Ultra Clean Holdings Inc (UCTT) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the Ultra Clean Technology fourth quarter results conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Monday, February 6, 2006. (OPERATOR INSTRUCTIONS). I would now like to turn the conference over to Jack Sexton, Chief Financial Officer. Please go ahead, sir.

Good afternoon and welcome to our fourth quarter financial results conference call. My name is Jack Sexton, CFO of Ultra Clean Holdings. And with me today is our President and Chief Executive Officer, Clarence Granger.

A few moments ago we issued a press release reporting financial results for the fourth quarter and year-end 2005. Separately, we announced that Ultra Clean intends to file a registration statement with respect to the offering by ID of 2 million shares of common stock, and by its stockholders of 4 million shares of its common stock in an underwritten public offering. Both press releases can be accessed from the Investor Relations section of Ultra Clean's website at uct.com.

In addition, we have arranged for a taped replay of this call, which may be accessed by phone. This replay will be available approximately hour after the call's conclusion and will be accessible for two weeks. The dial in excess number for this replay is 800-633-8284 for domestic callers, and 402-977-9140 for international callers. The pass code is to 21282733 for both domestic and international dialers. This call is also being webcast live with a web replay also available for 14 days from the Investor Relations section of our website at uct.com.

Together with our recently issued press releases, this conference call enables the Company to comply with the SEC regulations for fair disclosure. Therefore, investors should accept the contents of this call as the Company's official guidance for the first quarter of fiscal 2006. Investors should note that only the CEO and CFO are authorized to provide Company guidance. If at any time after this call we communicate any material changes in guidance, it is our intent that such updates will be done officially via public forum such as a press release or publicly announced conference call.

The matters that we discuss today include forward-looking statements as defined in the U.S. Private Securities Litigation Reform Act of 1995, related to matters including our future financial performance, cost reduction initiatives, new product shipments, and expanded production at our new China facility. Investors are cautioned that forward-looking statements are neither promises nor guarantees, but involve risks and uncertainties that may cause actual results to differ materially from those projected in the forward-looking statements.

Some of those risks and uncertainties are detailed in our filings with the Securities and Exchange Commission, including our most recent Form 10-Q filed for the quarter ended September 30, 2005. The Company disclaims any obligation to publicly update or revise any such forward-looking statements or to reflect events or circumstances that occur after this call.

Now here are the fourth quarter results. Revenues for the fourth quarter of 2005 was $38.8 million, a sequential increase of 41% compared to revenue of 27.5 million for the quarter ended September 30, 2005, and a decrease of 6% compared to revenue of $41.3 million at -- in the same period a year ago. Our fourth quarter revenue was above our guided range of 31 to $35 million.

Gross margin for the fourth quarter was 13.6%, an increase from 9.3% in the third quarter, and a decrease from 15.5% in the same period a year ago. The increase from the third quarter was due primarily to higher production activity which increased utilization in our factories.

Operating expenses were $4.6 million for the fourth quarter of 2005 compared to $3.5 million for the prior quarter, an increase of 30%. The increase is primarily due to a $738,000 charge for costs related to legal, accounting and consulting fees incurred in connection with our evaluation of a potential acquisition for which negotiations terminated during the fourth quarter of 2005. Net of this charge, operating expenses were only marginally about expectations, and $400,000 above the third quarter. The increase from the third quarter was primarily due to increased outside services and higher sales commissions and salaries.

Our effective tax rate for the fiscal year 2005 is 26%, down 8% from our expectation at the end of last quarter due to higher-than-expected export credits.

Net income for the fourth quarter was $686,000, increasing from a net loss of $566,000 in the third quarter of 2005, and decreasing from a net income of $2.1 million for the same period a year ago. Earnings per share for the fourth quarter of 2005 was $0.04, at the high end of our guidance range of breakeven to $0.04, despite the $0.03 per share negative impact of acquisition deal termination charges described earlier. For purposes of clarity this acquisition termination charge totaled $738,000 on a pretax basis, and $480,000 on an after-tax basis.

Turning to the balance sheet, cash of $10.7 million decreased $3.5 million during the fourth quarter as increased working capital needs related to revenue growth offset net income of $686,000. Accounts Receivable increased $3.7 million, or 24% during the period, to $19.5 million at the end of the fourth quarter due to a sequential increase in sales.

DSO was 40 days at the end of the fourth quarter, effectively flat with prior period. Net inventory increased $5.5 million, or 40%, during the quarter to $19.1 million at the end of the fourth quarter, due to significant growth in activity projected for the first quarter of 2006. Days inventory on hand calculated on a forward looking basis increased 4 days to 44 days at the end of the fourth quarter. Accounts Payable increased $3.2 million, or 28%, from $14.2 million at the end of the fourth quarter, due primarily to higher quarter end inventory purchases compared to last year.

Now Clarence will discuss our operating highlights for the fourth quarter and provide guidance for the first quarter of 2006.

As projected UCT enjoyed a significant recovery in the fourth quarter. We grew our revenue by 41%, exceeding the top end of our revenue guidance by $3.8 million, or 11%. Earnings per share, which included a $0.03 charge related to the termination of negotiations on a potential acquisition, were at the top end of the guided range, or $0.04 per share.

At the same time, UCT continued to deliver against the Company's strategic initiatives. We continued to grow production and revenue out of our Shanghai facility and grew revenue and shipments of our non-gas panel subsystems. Finally, we made significant progress towards the first article build on both of the two major subsystem contracts that were announced in our last earnings call. I will now provide more detail on these key accomplishments.

Total revenue from products produced in our Shanghai facility increased to $4.7 million, or 12% of total Company revenue in the fourth quarter, up from $1.7 million, or the 6% of total Company revenue in the third quarter. We thereby achieved our targeted goal of a 10 to 15% of our revenue out of our China facility in Q4. We accomplished this by ramping production of process modules for our initial process module customer out of our Shanghai facility, shipping 11 units in the quarter. Establishing a base in China is key to enhancing our competitive position and improving our profitability. We continued to see strong interest by our customers in transferring subsystem production to China. Additionally, we feel that having a presence in Asia will over the longer-term aid us in penetrating new OEM customers in Asia.

Total revenue from products, other than gas panel subsystems, including process modules, top plate assemblies, frame assemblies, and chemical delivery systems was $4.4 million or 11% of total revenue in the fourth quarter, up from $2.4 million or 9 percent of total revenue in the third quarter. Here again we achieved our targeted goal of between 10 and 20% in revenue coming from non-gas panel subsystems by Q4 of 2005.

While we did not ship any prototype units during Q4 from the two large contract awards that we announced in our last earnings call, we do anticipate first article shipments of both products in mid to late Q1 2006, with volume production beginning in mid Q2. Adding process modules and other large non-gas panel subsystems to our product offerings expands our total addressable market by three to four times. We believe UCT is well positioned to address this market, given our engineering expertise, our industry knowledge, and our capabilities in the area of low-cost system integration in an environment of rapid change. As we look ahead into the next quarter, we're very optimistic about our business. We expect revenue for the first quarter of 2006 to increase to between 47 and $51 million, and net income per share to range between $0.10 and $0.14.

In 2006 we will maintain focus on our two main growth strategies, expanding our non-gas panel subsystem business and growing our China manufacturing operation. Specifically we are doubling the targeted percentage of revenue derived from products other than gas panel subsystems to between 20% and 40% of total revenue by the fourth quarter of 2006. And similarly we are doubling the targeted percentage of revenue derived from our China operation to between 20 and 30% of total revenue by the fourth quarter of 2006.

In summary, we achieved our strategic milestones in 2005 and finished the year with great momentum. We achieved or exceeded our revenue and EPS guidance in each of the four quarters of 2005. We grew our China activity to our targeted levels and reach profitability in China by the end of 2005. We are expanding our reach into the semiconductor process tools, achieving our targeted level of sales of non-gas panel subsystems with good prospects going forward. And we remain very optimistic about our ability to maintain this momentum as we enter 2006.

Operator, we would now like to open the call for questions.

(OPERATOR INSTRUCTIONS). Bill Lu of Piper Jaffray.

Very nice quarter. Just a couple of questions. If I look at your 1Q guidance I'm assuming that most of the growth is still coming from the gas panel business, correct?

That's correct.

What will be the non-gas panel in 1Q?

We're saying somewhere between 10 and 15% would probably be a reasonable number. Obviously, we did 11% in Q4.

I guess my expectation should be that going into 2Q these two new customers ramp up and take up volume, I think you said that these could be about $5 million combined in run rate, is that right?

Yes, what we said on our last call was that combined they could be a $25 million annualized run rate for these products. And so our expectation -- we had hoped to have those completely ramped up by the end of Q1. It looks like due to the overall ramp in the industry our customers are proceeding a little slower to qualify these products. There's no issues related but to the qualification, just timing due to the overall conditions in the industry being quite aggressive. These have really been delayed about six weeks to two months. I would expect to see qualification and ramping to volume by the middle of Q2.

I guess you -- what I'm getting at is it seems like with these two customers you kind of get to the 20% number already. And you guided for 20 to 40% by end of the year. Does that mean that you need to get some other customers to get to the 40%, and where do you stand with that right now?

Absolutely. We would need to get additional -- not necessarily additional customers, but additional products to get to the 40% range. And again, we're certainly looking at opportunities. We're not in a situation where we have anything to announce at this time.

I hate to nitpick here, but fourth quarter margins, I thought it would have been a little bit higher given your revenue run rate. Is that just because the new products have slightly lower margins or what exactly is that?

You're right. We are slightly below what we would expect following our guidance from the last call. And really we had two things that kind of slowed us down a little bit. We didn't achieve full qualification out of Shanghai of our process module production, so a number -- a good number of our process modules in Q4 were produced in Shanghai and then bundled back through Menlo Park for final review prior to going to the customer. So that was something that we didn't expect. And also some of the expenses associated with getting set up for these two new contract awards were a bit higher than we expected. But again, we're talking 40, 50 basis points from what our expectation was.

John Pitzer from CSFB.

This is actually Ashis Kumar for John. What kind of visibility are you getting in 2006, especially as you start to look towards the back half of the year from your core gas panel business?

We don't really give guidance that far out. We really only give guidance one quarter out. In terms of our business relationships with our customers, we typically get forecasts from them that run in the 3 to 6 months timeframe. So we really don't have customer visibility out as far as you are requesting. Our knowledge on that would be strictly limited to what we hear from various analysts in the industry.

Okay. Can you talk a little bit about if you anticipate any potential component shortages or anything? And do you still expect to outgrow the OEMs in '06? Is that an issue for the [.com]?

The component shortages, obviously when you get into an upturn there is always concern about component shortages. And so what I would say at this point in time, obviously we are in a significant upturn, and we have many, many suppliers, and some of them are experiencing some difficulties in ramping up. But we have not caused our customers to miss a single one of their ship dates at this point in time. And so we think that can continue. There are challenges in a ramp like this, but we have been able to manage it so that it hasn't had any negative impact on our business, and we don't see any negative impact on our business for the foreseeable future.

In terms of outgrowing -- the second part of your question -- outgrowing the OEMs, again, we would say that relative to our gas panel business we view that as very stable and growing in line with the overall industry. What we would expect to be incremental to the overall industry growth rate would be the other non-gas panel business that we do. And then there is also some smaller opportunities with some smaller equipment companies in the U.S. and the longer-term potentially starting to do some business outside of the U.S. But our major reason for belief that we can grow faster than the overall industry right now is our expansion into non-gas panel subsystems.

Perhaps my final question. You had another press announcement for raising capital. Can you perhaps, to the extent that you can, talk about what potentially there is might offer longer-term growth prospects for you?

Our lawyers instruct us that we really can't discuss anything more than what is in the press release on this particular matter. So what is articulated in terms of what we would -- the use of proceeds is what we would answer there, basically working capital needs and potential acquisitions of companies and technologies.

(OPERATOR INSTRUCTIONS). Bill Lu from Piper Jaffray.

I was going to ask you about this potential deal that got terminated. I guess you can't talk about that either probably.

What we can say about that is it is consistent with our overall criteria for M&A candidates, meaning it was -- it would've been immediately accretive. It was a business in the subsystem integration area. And it was of significant size. We consider significant size somewhere in the 50 to $100 million range in terms of annual revenue. The deal was terminated because we couldn't reach agreement on terms. And so those are pretty much the comments that we can make.

And then just one quick question following -- if you look at profitability for the quarter, for fourth quarter, can you break it out between China and Menlo Park?

China contributed. They were profitable. They were profitable in line with the other U.S. facilities. It wasn't exceptional in either direction.

So the profitability breakout is similar to revenue breakout then, right?

More or less, correct.

Just one quick side note the year, that is our expectation going forward in 2006 as well as we look towards projected ETR.

Perfect.

Mr. Sexton, Mr. Granger, there are no further questions at this time. I will now turn the conference back to you.

That is a short list of questions, but we think everyone for participating in the call. And we look forward to speaking to again at the end of the first quarter. Thank you.

Thank you everyone.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.