Ultra Clean Holdings Inc (UCTT) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Ultra Clean Technologies first quarter results. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Monday, April 23, 2007.

I would now like to turn the conference over to Mr. Jack Sexton, Chief Financial Officer of Ultra Clean Technologies. Please go ahead, sir.

Thank you, Operator. Good afternoon and welcome to our first quarter financial results conference call. My name is Jack Sexton, Chief Financial Officer of Ultra Clean Holdings and with me today is our Chairman and Chief Executive Officer, Clarence Granger.

A few moments ago, we issued a press release reporting financial results for the first quarter 2007. The press release can be accessed from the Investor Relations section of Ultra Clean's website at www.UCT.com. In addition, we have arranged for a tape replay of this call, which may be accessed by phone. This replay will be available approximately one hour after the call's conclusion and will be accessible for two weeks. The dial-in access number for this replay is 800-779-2546 for domestic callers and 212-676-5414 for international callers. The passcode is 21335465 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 www.UCT.com. Together with our recently issued press release, 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 second quarter of fiscal 2007. 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, Sieger integration efforts, new product orders and shipments and expanded production at our 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-K filed for the year ended December 31, 2006. 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 first quarter results. Revenue for the first quarter of 2007 was $110.8 million, a sequential increase of 3% compared to revenue of $107.5 million for the quarter ended December 31, 2007, and an increase of 94% compared to revenue of $57.2 million in the same period a year ago. Approximately 37 percentage points of this increase over the prior year related to the acquisition of Sieger. The first quarter revenue was slightly above the high end of our guided range of $102 million to $110 million.

Gross margin for the first quarter was 15.1%, a slight decrease from 15.3% in the fourth quarter and an increase from 14.3% in the same period a year ago. The sequential decrease is due to a temporary shift in product mix which reduced demand and capacity utilization out of our Shanghai operation by approximately 33%. This reduction was offset by a 9% increase in revenue out of our U.S.-based facility.

Operating expenses in the first quarter were $8.9 million compared to $8.1 million for the prior quarter, an increase of 10%. The sequential increase of $800,000 is due to increased consulting and legal charges primarily related to the Sarbanes-Oxley compliance work.

The just completed year, fiscal 2006 ended December 31 was our first year of required compliance with Section 404 of the Sarbanes-Oxley legislation. We achieved a clean certification and reported this in our Form 10-K filed with the SEC on March 29, 2007. Most of the operating expense increase in the first quarter pertains to this effort. We also incurred higher than anticipated legal costs associated with our ongoing patent infringement lawsuit, which we expect to go to trial in June 2007.

Interest and other net expense was down just under $100,000 sequentially to $531,000 in the first quarter. These charges relate primarily to interest expense on debt put in place in support for the Sieger acquisition.

Our effective tax rate for Q1 and the rate projected for the full fiscal year 2007 is approximately 30%, decreasing from approximately 31% realized in 2006 and previously provided as guidance for 2007. The one percentage point reduction reflects the refinement of our expectations with respect to tax.

Net income for the first quarter was $5.2 million, increasing from a net income of $4.7 million in the fourth quarter of 2006 due to the removal of the one-time fourth quarter 2006 tax adjustment, which we highlighted in our last earnings call, and higher income on increased volume partially offset by $800,000 in increased consulting and legal charges described earlier.

Diluted earnings per share for the first quarter of 2007 was $0.24, at the midpoint of our guided range of $0.22 to $0.27. The $0.24 earnings per share includes a $0.01 per share charge for amortization of intangible assets related to the Sieger acquisition and a $0.02 per share charge related to SFAS 123R.

Turning to the balance sheet. During the first quarter cash of $24.6 million increased $1.3 million and third party debt of $30.1 million decreased $1.5 million. Taken together, net liquidity improved $2.8 million during the period. This is our third consecutive quarter of liquidity improvement.

Accounts Receivable of $47.5 million increased $2.9 million or 7% due to increased volume and slightly slower collections. Day sales outstanding increased one day to 39 days at the end of the first quarter. Net inventory of $51.5 million increased $3.6 million or 8% due to high quarter end inventory receipts. Days inventory on hand, calculated on a forward-looking basis, increased four days to 53 days at the end of the first quarter.

Accounts Payable of $40.5 million increased $2.9 million or 8% during the period due to increased quarter end purchases. Days payable outstanding increased two days to 46 days.

Finally, I would like to comment on our expectations with regard to the Company's application of FIN 48. We are substantially complete with our analysis. We expect no impact to the P&L in the current period or on a go-forward basis. The impact to the balance sheet is expected to be an $800,000 increase to tax provisions with $600,000 of this offset directly to beginning retained earnings and $200,000 offset to goodwill. The goodwill adjustment does not relate to the acquisition of Sieger. It pertains to the original acquisition of the Company back in 2002. These expected balance sheet adjustments are not reflected in the balance sheet provided with the just-issued press release.

Now Clarence will discuss our operating highlights for the first quarter and provide guidance for the second quarter of 2007. Clarence?

Thanks, Jack. I am pleased to report that the first quarter of 2007 was another quarter of strong operating performance for UCT, and that once again we made significant progress on our key strategic initiatives. By executing successfully on previously announced contract awards, we grew our non-gas delivery revenue by 9% sequentially. We received two Supplier of the Year awards from our customers, and we were awarded three new product builds from one of our major customers.

Financially, we set a new record for revenue. Revenue has now increased for the sixth consecutive quarter and was $800,000 above the high end of our guided range of $102 million to $110 million.

We earned $0.24 per share and, except for the higher than anticipated consulting and legal expenses that Jack discussed, we would have been at the high end of our guided EPS range and set a new record for the Company at $0.27 per share. Finally, we continued to improve liquidity, increasing our cash and reducing debt by a combined $2.8 million.

I would now like to provide further detail on these accomplishments. I am pleased to announce several new awards with one of our major customers, including a supermodule award on a new CNP platform, a new high level assembly award incorporating a chemical delivery module and frame, and a new chamber module award.

Beta units for these three products will be shipped in late Q2 to early Q3 of this year. Volume shipments are projected to begin in 2008. Combined 2008 revenue for these three new products is projected to range between $15 million and $25 million with further growth projected in 2009.

We remained focused on expanding our [into] processed modules and other sub-systems, and estimate that this increases our total addressable market by three to four times. We believe that we are well positioned to serve this market given our engineering expertise, industry knowledge, and capabilities in the area of low-cost system integration in an environment of rapid change.

Another UCT strategic initiative is focused on expanding our U.S. customer base. During our last earnings call, we discussed the production deliveries made to a new customer, Varian Semiconductor Equipment Associates. I am pleased to say that we grew our revenue with Varian in the first quarter and remain confident about our ability to expand our relationship beyond gas delivery systems to other critical subsystems.

It is our intention to leverage our leading position in gas delivery systems and our manufacturing presence in Asia to develop a market position with Asian-based customers. To this end, we have shipped our first gas delivery system to a customer based in Beijing, China. And we have been awarded our first gas delivery system with another Chinese customer based in Shanghai. Both of these customers will be serviced out of the UCT Shanghai facility.

As an update on our operations in China, as Jack mentioned, we experienced a sequential decrease in revenue in the first quarter. This was product mix related. Demand for the particular products built in Shanghai decreased in the first quarter. We anticipate this to be a short-term issue with many new products in the pipeline for qualification in China.

Our other Shanghai initiatives remain on track. As mentioned above, we added our first new Asian customers in the first quarter and the transition of our machining capability to a second facility in Shanghai is progressing as per plan.

Machined parts deliveries from the new Shanghai facility are expected to start in late Q3 of this year. Based on these developments, we are targeting to generate approximately 20% of our total revenues from our China operation by the fourth quarter of this year. Our confidence in the effectiveness of our operation in Shanghai and the cost advantages we obtained through our presence there continues to grow.

As a final update, our patent litigation case is proceeding on schedule and we expect the case to go to trial in June. The trial should last about two weeks. We remain confident that we will prevail in this matter.

Looking ahead to next quarter, we project a moderate decrease in industry demand. We expect revenue for the second quarter of 2007 to range between $100 million and $110 million, and net income per share to range between $0.20 and $0.26.

To summarize the highlights for the first quarter, UCT achieved record levels of revenue for the sixth consecutive quarter. We successfully ramped production on the process modules that we had previously announced. And we received three new significant awards from a major customer.

Customer qualifications for production transfer to China remain high and plans remain on track for our new machining facility in Shanghai. In addition, we continue to grow revenue and further develop our relationship with important new customers. Finally, we remain optimistic about our continued ability to grow faster than the industry.

With that, operator, we would now like to open the call for questions.

(OPERATOR INSTRUCTIONS). Jay Deahna, JPMorgan.

Good afternoon, Clarence and Jack. So, on the gross margin, obviously that's pretty dependent upon your loading in China. Just wondering, are we looking at a gross margin recovery sequentially, each quarter for the rest of the year? Where do we see gross margins in Q2 relative to the goal of getting up towards 16%?

We are looking for some level of accretion in Q2. Nothing dramatic, but we do look to progress towards our 15% target by year end. But most of that acceleration towards that target will happen in the second half of 2007.

And in terms of OpEx, specifically SG&A, are we expecting that to come down by about $600,000 or so in Q2 and if so, is that a sustainable level going forward or will that creep up with revenues because of commissions and whatnot later in the year?

You're about right. You're close in terms of what we're looking to spend in the second quarter in terms of reduction from the first quarter levels. We think it is largely sustainable. There will be a creep as we add volume and pay bonuses, sales and commissions on that higher volume. But that's right about -- what you had indicated is about the maintenance range for SG&A or total operating expenses.

In other words then, 2Q is kind of like a stabilization quarter, if you will. In other words -- well, OpEx actually comes down to a more normal level from an abnormal level. And gross margin starts the process of coming back. But as we go into 3Q, 4Q, you start getting back on track to your real business model improvement objectives -- is that an accurate way of reflecting it?

Correct. Especially with regard to margin. With regard to the operating expenses, we expect no great evolution between Q2 and Q3. Basically we expect to achieve close to what we're going to get to in Q2.

And then two other quick ones. First of all, the new -- actually three -- the dip in the mix from Shanghai, was that flat-panel related?

No, in this particular case it was not flat-panel related. It was one product. It was a more mature product and we saw some falloff in demand on that more mature product.

Is that a permanent issue with that customer?

It's not a customer function. It's a product-related function with that particular customer. So we're anticipating picking up the fall on generation for that particular product sometime in late Q3.

And then in terms of the new mandate that you mentioned in your opening remarks, I didn't see that in your press release. So was that something that you just announced in your prepared comments and that was the announcement for the world?

Which mandate are you talking about? The new --

The one where you got three pieces of business, [CMP], a chassis with some liquid stuff and a process chamber for one existing customer.

Yes.

So that was formally announced in your prepared remarks but there's not a press release associated with that?

That's correct.

And what kind of revenue are you talking about from that mandate this year? You said 15 to 20 next year, what are you looking at this year?

Yes, it's probably -- it's under $5 million. It's mostly prototype units.

Robert Maire, Needham.

Congratulations on your numbers, by the way. In your guidance for the current quarter in going forward, we're looking at slightly down. I take it that's demand from customers. Is this based on orders, guidance from customers? Is this across the board? Is it more in your core product or in Sieger? Maybe if you could give us a little bit more granularity on that guidance.

First of all, in terms of our customers, it's pretty much across all of our customers, we've seen a slight slowdown. We have not lost marketshare nor have we lost any new product opportunities. So it's not a function of losing business, it's strictly a function of the business that we've seen from our customers.

Relative to Sieger versus core UCT, I would say again, that's more of a -- we might have seen it a little bit greater potential for declining, but that's strictly related to the marketshares and specific customers and specific products.

And I realize your business is primarily a short-term business and all that and your sort of longer-term visibility is somewhat limited, but any particular guidance from customers as to the following quarter or any sense that you have in terms of how things are going? Or do you expect things to remain flat for awhile with perhaps a little uptick in revenue driven by new products and new customers? Anything that we could take away in terms of a longer-term view?

Sure. Again, we do not provide guidance beyond one quarter. So, this is just a general overall market feel. But the sense that we're getting into Q3 and beyond is relatively flat. I would expect exactly what you say to remain relatively flat with a few additions of new business opportunities.

Mark FitzGerald, Banc of America Securities.

I was just curious about the customer exposure, if you could tell us 10% customers?

Yes, the 10% customers -- we basically have three customers that make up about 85% of our business. Those include applied materials, Lam, and Novellus.

And could you tell us what it was for the quarter?

I don't have that exact split for the quarter. We normally don't provide that on our calls. We provide it annually and then we don't even discuss which customer generated which revenue. We basically describe it as customer A, B and C in our 10-K's -- in the most recent 10-K.

Are you guys pursuing any of the business in the solar equipment business at this point?

Yes, we are. One of our major customers has now become a significant player in the solar industry. And it looks like an excellent opportunity for us to tag along as well.

Jay Deahna, JPMorgan.

Clarence, pretty much everybody knows at this point that Samsung is shuffling some CapEx from Austin to Korea, which moves the delivery of some OEM systems from midyear into the latter part of year. So, for example, Lam talked about a 30% increase in shipments in Q2 and they sort of changed that to a split between 2Q/3Q. So besides that type of thing, that one specifically, are you seeing any incremental signs of anything more disturbing from your customers or is that primarily it? And as we roll into the second half of the year, do you see kind of a flattish demand environment from your customers based on the core cycle activity, which pretty much makes sense with most people's forecast for CapEx. And then you guys can see some new business mandates driving some level of sequential growth in your business. Is that accurate or could you articulate some sort of difference to that?

Yes, I guess what I would say is -- we're not seeing anything inconsistent with what our customers have said publicly. And so basically what we are seeing and hearing from them is that demand is down a little bit, but relatively stable and projected to remain stable for the foreseeable future.

And that's on the shipment side of things. Now are they telling you anything else in terms of being ready to ramp given prospects for potential upswing in their bookings in the second half of the year, anything like that?

It would be a little early for them to tell us about ramp readiness preparation if they're looking at something for Q3.

And then last question here -- do you see in your sales pipeline the opportunity to pick up another, let's say, $5 million or $10 million between 3Q and 4Q based on prototype revenue similar to what you just announced with that three-part win from your large customer, which could potentially come in within the next, I don't know, whatever, three or four months?

To try and paraphrase, I think you asked if there is a potential for an additional $5 million in prototype work incremental to what I already discussed. And I would say yes. We view the three wins that we announced did not deplete our pipeline of new business opportunities. So there are additional opportunities that could supplement that; potentially of the order of magnitude that you described.

Okay, great. Thanks very much.

(OPERATOR INSTRUCTIONS). Tim Summers, Stanford Financial Group.

Hi, Clarence and Jack, thanks for taking my question. Clarence, if you were giving guidance 30 days ago, would your revenue guidance 2Q over 1Q have been down?

I guess, obviously, your request is have we seen any decline in the last 30 days. Probably a little bit of decline in the last 30 days, maybe on the order of a couple percent.

Is that OEM-specific?

No.

And on these three pieces of business that you won, did you win those directly from the OEM? Or did you take share from a competitor?

They're -- all three of them are new products for our customer. That's why the ramp up cycle is so long; they're brand-new products for our customer. So we did not take marketshare from anybody else.

And then one last follow-up and I'll go away. You said non-GAAP panel business was up 9%. Does that include or exclude Sieger?

That excludes Sieger. That's just the historical, previously announced non-gas delivery system wins at core UCT.

And is Sieger still running around $30 million a quarter?

We normally don't split that out in that level of specificity. You can get there a little bit if you take a look at the comment in the press release about how much Sieger is of the year-to-year increase. [Use their] guidance there.

(OPERATOR INSTRUCTIONS). [Adam Mizel, Preferred Capital].

You mentioned two new orders from Chinese customers. Can you give us a little bit more depth on what types of products, what over time the magnitude of those customers could grow to, and whether you think this is the start of a larger Asian business, which I think over the medium to long-term is a pretty interesting element of your strategy?

Sure. This is Clarence, I'll address that. First of all, the two products are typical front end equipment tools, CVD and Etch. And the customers -- we don't think the China customers are going to be hugely significant customers. They're relatively small companies. But what we do believe is that this represents a first step for UCT.

We're targeting Chinese customers, Korean customers and eventually Japanese customers. And so we think this is a good first step. It's our first toehold into Asia. We now have Asian account representatives. And so I would expect our next wins would be likely to be in Korea.

It's always hard to predict, but is that a three month or a three year kind of statement when you think you'll make more progress in Korea and then maybe even Japan?

Korea is certainly less than a three opportunity. It wouldn't be surprising if something happened this year. Japan is still a tougher nut to crack but we're getting serious about it.

Gentlemen, there no further questions on the audio bridge. Mr. Sexton, I'll turn the call back over to you.

Thanks, operator. We'd like to thank everyone for joining the call. We look forward to speaking with you again in the next conference call and perhaps we'll see you at one of the investor conferences scheduled in May. For the scheduled dates, please check our website. Thanks, again, and operator, I'll turn it back to you.

Thank you. Ladies and gentlemen, that does conclude our conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have yourself a nice day.