Ultra Clean Holdings Inc (UCTT) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Ultra Clean Technology second quarter financial results conference call. 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, July 23, 2007. I would now like to turn the conference over to Mr. Jack Sexton, Chief Financial Officer. Please go ahead, sir.

Thank you, operator. And good afternoon. And welcome to our second 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 second quarter 2007. The press release can be accessed from the Investor Relations section of Ultra Clean's Web site at 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 800-952-6697 for domestic callers and 212-231-2900 for international callers. The pass code is 21342392 for both domestic and international dialers. This call is also being web cast live with a web replay also available for 14 days from the Investor Relations section of our Web site at 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 third 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, new product orders and shipments, and expanded production at our China facilities. 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 March 30, 2007, and Form 10-K, filed for the year-ended December 29, 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 second quarter results. Revenue for the second quarter of 2007 was $104.7 million, a sequential decrease of 6% compared to revenue of $110.8 million for the quarter-ended March 30, 2007 and an increase of 53% compared to revenue of $68.5 million in the same period a year ago. Approximately, 31 percentage points of this increase over the prior year relate to the acquisition of Sieger Engineering. Our second quarter revenue was in the middle of our guided range of 100 to $110 million. Gross margin for the second quarter was 15.1%, unchanged from the 15.1% recorded in the first quarter and a decrease from 15.6% in the same period a year ago. The flat gross margin percent reflects moderate volume-related improvements and capacity utilization in China, off setting moderate volume-related declines in capital utilization in our U.S. facility.

Operating expenses in the second quarter were $8.3 million, compared to $8.9 million for the prior quarter, a decrease of 6%. The sequential decrease of approximately $600,000 is due to approximately $600,000 in lower accounting and consulting charges primarily related to Sarbanes-Oxley compliance work, and approximately $300,000 in lower compensation expense, offset by approximately $300,000 in increased legal costs associated with our patent infringement lawsuits, which as expected went to trial in June, 2007.

Interest and other net expense was down $72,000 sequentially to $459,000 in the second quarter. These charges relate primarily to interest expense on debt, put in place in support of the Sieger acquisition. Our effective tax rate through the second quarter and the rate projected for the full fiscal year 2007, is approximately 29%, down 1 percentage point from prior period. Net income for the second quarter was $5.1 million, decreasing from net income of $5.2 million in the first quarter of 2007. Diluted earnings per share for the second quarter 2007 was $0.23, in the middle of our guided range of 20 to $0.26. The $0.23 earnings per share includes a $0.01 per share change for amortization of intangible assets related to the Sieger acquisition and a $0.02 per share change related to SFAS 123-R.

Turning to the balance sheet, during the second quarter cash of $19.9 million decreased $4.7 million, and third-party debt of $28.9 million decreased $1.2 million. Taken together, net liquidity decreased $3.5 million during the period. This decrease is primarily due to a $7.5 million reduction in supplier accounts payable during the period. Accounts receivable of $49.8 million increased $2.4 million, or 5% due to slower collections. Days sales outstanding increased four days to 43 days at the end of the second quarter. Net inventory of $48.4 million decreased $3.1 million or 6% in line with reduced activity levels. Days inventory on hand calculated on a forward-looking basis decreased one day to 52 days at the end of the second quarter. Accounts payable of $33 million decreased $7.5 million or 19% during the period, due to reduced activity and acceleration of supplier payments at quarter-end. Days payable outstanding decreased seven days to 39 days.

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

Thanks, Jack. I am pleased to report that the second 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. We hit the middle of our guidance range for both revenue and earnings per share in an environment of moderately declining industry demand. We received two significant new process module awards and we added a new U.S.-based gas delivery system customer. We grew our revenue in China by 22%, and remain on track toward achieving our target of generating 20% of total company sales from our China facility by the fourth quarter of 2007.

I will now provide further detail on these accomplishments. During the quarter, we received two new product awards from two of our existing OEM customers. For both of these process modules, first article deliveries are scheduled for September and October. With both sub systems projected to ramp to volume production in early 2008. The combined revenue potential of these two opportunities is estimated to be between 25 and $35 million in 2008. One of these awards is the next generation of a process module that we have been building since the third quarter of 2005. The second award is a process module on a new cleaner tool which is scheduled for initial product launch in the fourth quarter of 2007. These awards further extend our move in the non-gas delivery products and grow our relationship with these customers. We remain focused on expanding further into process modules and other non-gas delivery sub-systems. We estimate the incremental worldwide market opportunity for these modules to be $2.4 billion, and that as of today, only 20 to 30% of these modules have been outsourced. We believe our customers will continue to outsource these modules at a rapid pace and that we are well positioned to serve this market, given our engineers expertise, industry knowledge, and capabilities in the area of low cost system integration and in an environment of rapid change.

Another UCT strategic initiative is focused on continuing to expand both our gas delivery business, and our U.S. customer base. I am pleased to announce today, that we have begun shipping gas delivery systems to another significant new U.S.-based customer. As with other customers, we are confident in our ability to ultimately expand our relationship with this new customer beyond gas delivery systems to other critical sub systems. It is also 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. I'm pleased to say that all aspects of this Asian-based initiative are on track.

Revenue from our Shanghai facility increased 22% during the second quarter, and included initial sales to the two China-based customers announced in our last earnings call. The transition of our machining capability to a second facility in Shanghai is progressing on plan. This facility is scheduled to be completed late in the third quarter, with machine parts deliveries expected to begin early in the fourth quarter. Based on these developments, we are targeting to generate approximately 20% of our total revenues from UCT's China operation during the fourth quarter of this year. Our confidence in the effectiveness of our Shanghai operations and its cost advantages continues to grow.

Looking ahead to next quarter, we project a further moderate decrease in industry demand. We expect revenue for the third quarter of 2007 to range between 95 and $103 million. And net income per share to range between $0.16 and $0.22.

To summarize the highlights for the second quarter, UCT achieved revenue and earnings per share at the middle of the guided range. We received two significant new process module awards from two key customers. We added a new U.S.-based customer. We maintained a strong pipeline of customer qualifications for product transfers to our China facility, and we stayed on schedule for the opening of our new machining facility in Shanghai . 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.

Thank you. (OPERATOR INSTRUCTIONS) . One moment please for our first question. Our first question comes from the line of Jenny Yune, please go ahead.

Hi, guys. How are you?

Good, Jenny.

A couple of questions. How much revenue came from gas versus non-gas?

The percentages that remain pretty flat, the non-gas was in the high 30s and the gas delivery was in the low 60s.

And are you -- can you remind us what your revenue targets are there for the end of '07?

Basically what we said at the end of '07, we would be right in the vicinity of 44% non-gas in that fourth quarter.

Okay. And then gross margin was a little bit lighter than we were modeling. Where do we go from here with gross margin?

First, in terms of the second quarter gross margin you had a little bit of a shift into Asia which is helpful. This is offset by downward movement in the U.S. and an overall reduction from Q1 levels. So basically, the pickup that we realized by moving more to China was offset by these other two factors. Going forward, we continue, as Clarence indicated, to drive towards 20% of our revenue coming out of China by the fourth quarter of '07, so you will see a nice big step in Q3, and then a further step in Q4, up to 20%, and we are expecting now the pendulum to swing a bit such that the pickup that we received in China by moving more to China does more than offset the downward motion that we have in the U.S. And as you can see from our overall guidance, that downward movement is going to continue during a flattish period, flattish to down period in the industry, but then ideally, when that turns itself around, we don't have so much of an impact of lower volume dragging our margins down.

So will most of the uplift come in the fourth quarter maybe?

I would say it is more weighted to the fourth quarter but we do have a nice improvement in the amount of business that we're running out of China in the third quarter. It is just there is a fair -- a little bit of a transition period to get there, and we should realize the larger benefit in the fourth quarter.

Okay. And then just if you could update, you had some business from Varian. Have you been able to get any sort of like non-gas business for them or how is that looking?

Hi, Jenny. This is Clarence. At this point, we've actually gotten some small sub-systems that are non-gas delivery related. But we haven't penetrated the larger sub-systems similar to some of the larger process modules that we're talking about with other customers. So, again, we're still in the early stages with Varian in terms of penetrating them for additional business opportunities. We're very well positioned now with the gas delivery system business, but we're still in the very early stages of expanding beyond the traditional gas delivery business.

Okay. Great, Thank you.

Thanks, Jenny.

And our next question comes from the line of Robert Maire from Needham. Please go ahead.

Yes, can you hear me okay?

Yes, Robert.

Some indications we were getting last week from Semi Con West and from some company's earnings announcements would suggest that we are -- I don't know if I would be so bold as to say near a bottom or at a bottom or it sounded like guidance out of one of your larger customers was way flat, September quarter. I realize that you're in a turns business, and your visibility is somewhat limited, but do you have any sense or any sort of gut feel or what are you hearing from customers in terms of where we are in terms of the downturn?

Yes, sure, Robert. This is Clarence. What I would say is again, we don't give guidance more than one quarter out. And so we think our third quarter is pretty much reflective of what our customers have been indicating in their earnings calls but in terms of a general sense, in the fourth quarter, and beyond, at least in the fourth quarter, we're starting to get a sense from our customers that revenue should be flat to slightly up. So I'm more encouraged about what I expect in the fourth quarter.

Okay. And a couple of other question, in terms of your growing faster than industry average, it would appear that your decline has been somewhat less than the overall industry's decline by a few percentage points. Would it be correct to assume that when the industry resumes growth that you will, how shall I say put more distance between yourself-- your own growth rate and the industry's growth rate? In other words, you're closer in terms of rates of decline but probably a little further apart when the industry growing again?

Yes, Robert, again, this is Clarence. I would absolutely agree with that statement. Last quarter was our peak in revenue and we did 110.8 million. If you took our mid range of our guidance this time, it is roughly 99 million in revenue. So from peak to trough, we're talking about assuming that Q3 did turn out to be the trough, we would be talking about an 11 or 12% decline from peak to trough, which we believe is far less than we've experienced in the past, and certainly we believe less than some of our customers are experiencing peak to trough. And as we've mentioned before, obviously we're announcing last quarter, we announced three new wins, this quarter, we're announcing two new wins. So this is the time when our customers have more time to focus on outsourcing, when we tend to get product or new opportunity wins that then manifest themselves in significant revenue increases when we come out of this slowdown, and so we would fully expect, we've done this in the past, we would fully expect to see some dramatic growth once the industry comes out of its doldrums.

And one last question related to that answer. Have any customers taken business back in on a temporary basis during the downturn or is there been any sort of reversal or stopping of outsourcing during the downturn for those companies who maintain internal production as well as outsourcing?

We haven't seen any reversals. In one or two small cases, companies may slow down some of the smaller companies might slow down their activity, but by and large, by far the most dominant trend is to use this slower period as an opportunity to identify products that can be quickly outsourced. The other thing that we're seeing is we're seeing a much more aggressive focus on China. Some of our customers who were slow to move on China a year ago, are now asking us what needs to be done to move quicker in transitioning products to China. So I think they are all using this opportunity to look at ways to outsource more and outsource more to low cost regions.

Okay. Thank you.

You're welcome, Robert.

And as a reminder to our audio participants, if you would like to register for a question, please press the one followed by the four on your telephone. Our next question comes from the line of Tim Summers. Please go ahead, sir.

Yes, thanks. Good afternoon, everyone. On your response to the last question, you mentioned, Clarence, that you're beginning to sense that revenue in the fourth quarter of guidance from some of your customers is up. Did I hear that correctly?

I don't know if the guidance from our customers is formally up. Some of them have said it is up. But in general, what I'm saying is what we're seeing would indicate flat to up in the fourth quarter.

I'm sorry, does that indicate that on your sort of steady state business, that is going to be up? Or as you just look at your total build, that will be up quarter over quarter?

I think mostly at this point we're looking at our total build.

Okay. Got it. And secondly, could you give us an idea, are you seeing -- is Sieger seeing relatively strength or weakness versus your process module and gas panel business?

Yes, that really tends to be product specific. So CMP, Sieger's business was heavily focused on CMP. CMP saw an earlier decline than some of our other business aspects. That is now stabilized and seems to be -- well, seems to be stable, and with the potential of turning up earlier than some of our other products.

Okay, great, Clarence. Thank you.

You're welcome, Tim.

And our next question comes from the line of Jesse Pichel. Please go ahead.

Hi. Jesse Pichel here from Piper. What is your utilization, your capacity utilization in the U.S.? And then again for China?

We're in the mid to high 80s, closing on 90% in the U.S., and China, we're still in the -- just below 40% capacity utilization on our initial facility in Shanghai. And of course, we're just getting started on the machining facility. We expect revenues to start there in the fourth quarter of '07.

And the lower gross margin that you cited in the U.S., and that's due to lower volume and under utilization or is it due to price?

It is basically utilization. You have a bit of a volume drop, and there is a small -- and it wasn't significant, it wasn't large, but there was a small tick-down in terms of margin percent.

Is there anything you could do there to improve the margin in the U. S., in the event that this protracted flatness stays for a few quarters?

Well, part of the answer is volume. And we don't think volume is impossible to return up close to 100%, or 95% of capacity, and that will come in the form of our base business, but also some of the new modules that we're announcing will be produced here in the U.S. And then of course, there is always the advantage of volumes that we picked up over the last several quarters, using the leverage of that, with discussions with our suppliers and basically, increasing our margins on that basis.

But there is no way to say right size, the factory, to improve the loading a bit?

Well, to the extent that there is a shift down to the point where we could make some moves from a factory standpoint to take out costs, we certainly would.

Why -- I'm sorry, go ahead.

No, that's all I had. What else did have you as a follow-up?

Just for clarity sake, why would a new program ever want to use you for U.S. production at this point given your capabilities in China? I mean is there high turns business there or --

Jesse, this is Clarence. So what tends to happen is a lot of our customers on a brand new product, they will still have some issues that they're trying to work out, basically what you would call de-bugging, and so they really want to start initial production in the U.S. to gain a comfort level and stabilize the product itself. And then they would eventually transition that to a low cost region. There is also a few other products that our customers consider to be extremely IP-sensitive, and so for their own reasons they don't want those products to migrate outside of the United States, so every customer has a different approach, but that's why some of the customers want to keep some of the products in the United States.

Thank you very much.

You're welcome.

And our next question comes from the line of Adam Menzel from Aquifer Capital. Please go ahead. Mr. Menzel your line is now open if you would like to go ahead with your question.

Sorry about that. Hi, Clarence and Jack.

Hey, Adam.

Could you summarize the total dollars of revenues of new orders that you've announced that have not really hit our quarter or our 2007 and will contribute in 2008? I think I have a guess but I would just like to know what you guys think the number is.

Sure. Well last quarter, we announced 15 to $25 million in incremental business associated with three new module awards that we had won, and this quarter, we announced 25 to 35 million in new opportunities associated with the two modules that we have already -- that we announced in this call. All of those opportunities are scheduled to impact us starting in early 2008. So if you added that up, it would be 40 to 60 million. So if you picked the mid range of that, those five opportunities in and of themselves represent an opportunity for approximately $50 million in incremental revenue to UCT in 2008. So that is basically how we're able to outgrow the industry. That represents, roughly, a little over 10% of our total revenue, and so if you assume that is on top of whatever industry growth rate we experience in 2008, we would expect to grow that much faster than the overall industry.

And that kind of 40 to 60 million range is presuming kind of industry growth environment -- I guess the question is, does that have upside or down side based upon how rapidly the industry is growing independent of those awards, right?

Yes, those-- that -- That 40 to 60 million is just what those customers are projecting for those particular products. So obviously, we believe that there are going to be additional incremental opportunities for additional module wins, and then of course, if the industry does start to grow, we would expect to grow as a result along with the industry.

And those awards could be bigger or smaller based upon how much the industry grows? And (Inaudible)

Of course.

And a related question to that would be can you walk through then the expected average kind of gross margin on that kind of incremental revenue, and the average net margin? Part of what I'm trying to understand is the operating leverage inherent in that incremental business against in your fixed costs.

Yes, Adam, so we normally have about 6% of fixed costs covered already in our model so the incremental growth margin tends to come in around 21, 22%.

And then in terms of --

You the math from there.

Operating costs though, you add?

There is a small portion of additional sales costs, probably in the -- less than 1%, for sales costs, and of course, from an accounting, personnel standpoint, there is no material increase as a result of the new business.

So round numbers, you think that new business is 8 to 12 million of gross margin and it sounds like 7.5 to 11.5 million of free tax? Is that the way we think about it? Because it is pretty much gross margin almost is on the bottom line.

I would take 1% for sale, 1% for engineering support, and then the taxes continues at 29% ETR.

One more question and then I will get out of the line. As you're competing for these new awards, who are you typically competing against? And are you seeing the competition for these new outsourced projects increase, decrease, stay the same?

Again, Adam, this is Clarence, so the people that we're tending to compete against in these larger process modules are some of the EMS companies, Flextronic, Sanmina and Foxccon tend to be the competitors but it is not clear that they are well suited for this industry. They are really, their strength is in high volume manufacturing, and so we think that the opportunity is there for us to dominate this industry, and we're very optimistic. But those are the people that we're starting to compete against.

Okay. Great. Well the need is great. I think the new awards are great. Thanks for the update.

You're welcome.

Thanks, Adam.

And our next question comes from the line of Adam France with Keane Capital. Please go ahead.

This is Macon Rudisill for Adam France. I guess my question was sort of addressed previously, but it had to do in terms of the new orders, you mentioned 50 million, I guess so that is sort of the aggregate number of new orders that you've announced this year, that you expect to flow into 2008, is that correct?

Well, those are not necessarily new orders, I mean obviously we get new orders all the time, those are new products that we have not done in the past. So they're completely new products for us.

And what is sort of the cycle time between the time a new product is designed in and the time that revenue is recognized on that product?

Well I will let Jack talk about revenue recognition, but in terms of the time between our getting recognized -- or awarded the project, and actually going into volume production, it really depends on the maturity of the product. In the cases of these products that we've talked about today, they are all new products for our -- or relatively new products for our customers. So we're -- it takes a little bit longer because we get qualified and then we ship prototypes and then they introduce their product to the marketplace, so you can typically again, what I've said in this earnings call, is that we're going to be -- we were awarded this business, we're making prototypes in the September/October time period, and then we expect to go into volume production in Q1 of '08. So it is about a five to six-month cycle.

Hi, Macon, this is Jack. With respect to revenue recognition, we are selling sub-systems. They basically are recognized on delivery to the customer. So there isn't an inspection or a qualification process that delays our recognition of that revenue.

I know it is very odd that the business conditions are soft and you're not-- not like you are experiencing this alone, but when you look into 2008, and I know it is a long way to forecast your industry I guess it was the semiconductor industry association data came out the other day, and they said they thought the equipment industry would grow around a percent this year, which heading into the year you had people as negative as to down 10 to up 5. And then next year, they are actually forecasting a rebound of-- toward the tune of 7 to 8%, which is substantially higher growth rate. Yet, you have people like Intel cutting their CapEx, obviously bringing their budgets down. Where is -- if you had to hang your hat on some optimism for next year, which is obviously important as a shareholder in this Company, where do you see that optimism? I mean a lot of people to base those estimates off the data that that industry puts out so where do you think they're getting their optimism for such a reacceleration of growth for 2008?

Boy, that is a tough question for us to answer. I mean we do depend on a lot of analysts' commentary. Obviously, what the SIA said about, 7% growth in the semi industry in 2008, would be a very good thing for UCT, and that's what we are hoping will happen. I don't have visibility beyond the fourth quarter of 2007. So I really -- we are not knowledgeable in those areas. But what we are projecting is that whatever the growth rate is for the industry next year and historically in the past is that we will grow significantly higher than that growth rate, whatever it may be.

So I mean hypothetically if that number turns out to be, 4%, instead of 8%, then you should be able to grow 10 to 15% higher than 4%, which would be closer to 20% growth?

That's what we would expect, yes. We would expect next year if the industry were to grow somewhere between 4 and 7%, we would grow at 10 to 15 percentage points higher than that. Based on the current outsourcing trends.

One quick question. Was there -- in terms of this -- the sequential guidance, was there one particular customer that has held back spending or was that just sort of a blend of several customers?

Virtually all of our customers are seeing a slowdown right now.

So the difference between the two revenue ranges you gave, there wasn't some kind of particular circumstance that makes it -- it just seems like a wide range between the two in such a short period of time in three months. I was just curious if it was waited toward one customer or not.

No, it is not waited toward one customer. We do have some degree of volatility in our industry. So if things get significantly better or significantly worse, we typically have a six-week delivery time, so if things get significantly better, or significantly worse, that can impact us within a quarter.

Okay. And I'm sorry, this will be the last question, but if , assuming that the business doesn't improve, are there costs that can continue to come out of the business, either from your outsourcing standpoint, or how lean would you say your cost structure is at this moment, if you needed to go in and cut costs in order to improve margins, how much room do you have from there, at sort of this revenue run rate?

We have pretty significant room, last time we had to worry about getting very, very lean was Q3 of '05, and we did do so, and we can certainly get back there. We've grown since. We've brought on new business. And expanded of course our China facilities. So we do have room to cut back further. At this point, we haven't taken out all of the stops in terms of the cost reductions. We don't see a off-the-cliff type reduction in demand and so we're keeping the resources ready for some good growth in the not too distant future.

Yes, part of our objective here is obviously to deal with the current slowdown but also, we need to position our company for our long-term strategic growth, and so we could do -- take some more drastic actions right now. If we thought this was the level that we were going to living at for the next couple of years, then we might take some further action, but frankly, we think we are going to see -- obviously we talked about these new opportunities, so we think those new opportunities are going to come to fruition next year, and we need to make sure we maintain the resources to be able to address those, and whatever other opportunities might come along.

I'm not sure if there this is a fair question to ask or not, but it would seem, given a reasonable economic environment next year, if you're able to grow 15 or 20%, look at your potential earnings power you could make -- I mean I guess it's up to the shareholder but you could make the case for under or over valuation and at times I know you mentioned the buyback of stock at certain levels. I was curious if that is in the cards. As well as -- well, that was the question.

Macon, with our current cash position, we've got a net debt of about $8 million at this time. We don't -- we see better uses of cash and additional debt capacity we have in place than buying back shares. The one thing we do do is we go to pains not to dilute the shareholders in any way, and then we think there are opportunities out there for our type of business, which would be first in line in front of a share buyback.

Thanks for your time.

You're welcome.

And next, we have a follow-up question from the line of Jenny Yune, from JPMorgan. Please go ahead.

A few more questions. First of all, one of your customers Intuitive Surgical had a good print last week and saw it's stock jump 30%. Are there any additional revenue opportunities there for you guys?

I think you know -- Jenny, this is Clarence. I think you know we make all of the robots for Intuitive Surgical, the surgery-related robots and as they grow, then we gain a benefit from that. They are a good customer, a very good customer to us with very good growth, but they're still at this point less than a 10% customer but they are growing very rapidly and we do benefit from that.

So it is not just a certain product line. It is all of their robots?

It is their main product line.

And that's like the da Vinci or something?

That's correct.

Okay. And then what is your head count currently and where do you think it can go, like I don't know, by the end of '07 or into '08, like where should that trend up or down.

Head count, Jenny is 984 at the end of the second quarter, down from 1026 at the end of the first quarter. So we will continue to transition, we will have some growth in China with offsetting decreases in the U.S. and, of course, looking at our short-term picture with our third quarter guidance it will come down further but it will come down in line with the activity. Or up in line with activity to the extent we see that growth out in Q4 and beyond.

So could it go up as you ramp all of this extra business? Is that right?

Yes, that is likely.

Correct.

Okay.

As long as the revenue is there and the profits are there to support it.

So and that will mostly be in China, like your revenue -- your employee base in the U.S. should go down a little bit and then be more than offset by increases in China? Is that how I should look at it?

We will continue to grow our population in China and align our population in the U.S. to the demand requirements in the U.S.

Okay. Got it. Okay. Great. Thank you.

Thanks.

And again, as a reminder to our audio participants if you would like to register a question, please press the one followed by the four. Our next question is a follow-up question from the line of Tim Summers from Stanford Group. Please go ahead.

Yes, just a housekeeping question. Jack, you mentioned that accounts payable had gone down because you were accelerating supplier payments. Why would you do that in a downturn?

Tim, that is a good question. And to be honest you with, that was just a little bit of taking your eye off the ball around the middle of June. We had some new accounts payable staff who were going after getting their suppliers paid, and we just accelerated. We normally would not have dropped it like we did.

So should we assume it will go up in the third quarter?

Yes, as you saw from the text, we dropped below 40, in the high 30s. We normally would keep that in the mid to low 40s, aligned with when our customers pay us. How quickly our customers pay us. So yes, you should see some recovery there.

How much cash did you generate in the quarter, do you know?

We actually had a reduction in net liquidity of 3.5 million, and again, that is because we paid the 7.5 in supplier.

Got it. Okay.

So if you back that 7.5 out, of course you get 4 million in cash generation.

Okay. Good. Thanks, Jack.

Okay.

And it would appear that we have no further questions at this time.

So I would like to thank everyone for joining the call, and we look forward to speaking to you on the next quarter call or at another Investor Relations event. Please check our Web site at UCT.com for our Investor Relations calendar. Thank you.

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