Ultra Clean Holdings Inc (UCTT) 2007 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. 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 Tuesday, February 19, 2008.

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

Thank you and good afternoon. Welcome to our fourth-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 fourth-quarter 2007. The press release can be accessed from the investor relations sections 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 one hour after the call's conclusion and will be accessible for two weeks. The dial-in access number for this replay is 800-633-8284 for domestic callers, and 402-977-9140 for international callers. The pass code is 21-37-36-80 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 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 first quarter of fiscal 2008.

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 a 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 US Private Securities Litigation Reform Act of 1995, related to matters including our future financial performance, new product orders, and shipments, consolidation of activities in the US, 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 September 28, 2007, and Form 10-K filed for the year ended December 29, 2006.

The Company disclaims any obligation to publicly update and revise any such forward-looking statements, or to reflect events or circumstances that occur after this call.

Now here are the fourth-quarter results. Revenue for the fourth quarter of 2007 was $92.8 million, a sequential decrease of 2.9% compared to revenue of $95.5 million for the quarter ended September 28, 2007 and a decrease of 13.7% compared to revenue of $107.5 million in the same period a year ago.

The sequential decrease was due to reduced demand from nearly all semiconductor capital equipment customers. Fourth-quarter revenue was slightly above the midpoint of our guided a range of $87 million to $95 million.

Gross margin for the fourth quarter was 12.7%, down from the 14% recorded in the third quarter, and a decrease from 15.3% in the same period a year ago.

Of the 130 basis point sequential reduction in gross margin, 30 basis points were due to reduced factory utilization on lower industry demand. 80 basis points were due to labor and freight variances resulting from numerous late-quarter scheduling changes by our customers which were not fully recouped. 20 basis points were due to unfavorable mix and transition expenses.

Operating expense in the fourth quarter was $9 million, compared to $7.9 million for the prior quarter, an increase of 15%. The sequential increase of approximately $1.1 million is due to $300,000 in higher depreciation and support costs associated with our new ERP system. $200,000 in increased operating expenses associated with the startup of new facilities. $400,000 in increased outside services including accounting fees. And $200,000 in increased expenses associated with court injunction on our substrate patent dispute.

Interest and other net expense of $347,000 decreased approximately $100,000 sequentially due to reduced interest charges on lower debt. This debt was originally put in place in support of the Sieger acquisition.

Our effective tax rate for the 2007 fiscal year decreased to 27% from 29% previously projected for the full fiscal year 2007 due primarily to savings associated with the effect of our foreign operations. This change resulted in a fourth-quarter 2007 tax savings of approximately $0.02 per share.

We project that our effective tax rate for 2008 will return to 29%, as the tax rate in China is projected to increase from 0 in 2007 to approximately 10% for fiscal year 2008 as a result of the transition of our tax holiday in China.

Net income for the fourth quarter was $2.3 million, decreasing from net income of $3.5 million in the third quarter of 2007. Diluted earnings per share for the fourth-quarter 2007 was $0.10, within our guided range of $0.08 to $0.14. The $0.10 EPS includes a $0.01 per share charge for amortization of intangible assets related to the Sieger acquisition, and a $0.04 per share charge related to SFAS 123R.

Turning to the balance sheet, during the fourth quarter, cash of $33.4 million increased $5.4 million sequentially, while third-party debt decreased $5.8 million, to $22.2 million. Taken together, cash net of third-party debt improved $11.2 million during the period.

Accounts receivable of $34.8 million decreased $8 million or 19% due to improved collections and lower revenue during the period. Days Sales Outstanding decreased seven days to 34 days at the end of the fourth quarter.

Net inventory of $49.6 million decreased $1.5 million or 3% due to a partial workdown of inventory brought in at the end of the third quarter in support of a new ERP system implementation. Days inventory on hand calculated on a forward-looking basis decreased slightly to 60 days at the end of the fourth quarter.

Accounts payable of $36.8 million increased approximately $3.3 million or 10% during the period. Days payable outstanding increased five days to 49 days.

Now Clarence will discuss our operating highlights for the fourth quarter and provide guidance for the first quarter of 2008. Clarence?

Thanks, Jack. The fourth quarter of 2007 was another challenging period for the industry in which we saw a third consecutive quarterly decline in industry demand and numerous last-minute scheduling changes by our customers. These changes led to labor and freight inefficiencies, which we were not able to fully recoup.

The fact that we were operating for the first time on our new ERP system made managing these change requests more challenging than normal. I anticipate significant efficiency improvements in the short term as we become more familiar with this new system.

With respect to commercial highlights during the quarter, as announced in our press release we secured two key new quarters during the period. Additionally, the Photon Dynamics order announced last quarter was expanded to include complete turnkey systems.

We grew our China-based revenue by 21% during the quarter, increasing the percentage of revenue derived from our Shanghai operations to 16% of total sales. We began initial production at our recently-completed second facility in Shanghai.

In the US, we began building improvements at the facility where we will consolidate our Silicon Valley based assembly operations. I will now provide further detail on these accomplishments.

During the quarter, we secured two new orders which significantly extend the work we do in support of two key customers. One of the orders is a medical system order from Intuitive Surgical. This is a new product for Intuitive Surgical and is an incremental revenue opportunity for UCT.

The second order is for a non-gas delivery assembly from Varian Semiconductor. This is the first non-gas delivery order we have received from Varian and represents a key expansion in our supply relationship.

Combined, the two orders represent approximately $5 million to $8 million in additional annual sales. Shipments for both of these orders should begin in Q3 2008.

Additionally, the Photon Dynamics order announced last quarter was expanded to include complete turnkey test systems for the flat-panel industry. This is the first turnkey test system manufactured by UCT and will be produced in our new China facility starting in Q2 of 2008.

These orders represent continued steps in our drive to increase our market share by capturing newly-outsourced process modules.

We are focused on expanding process module opportunities in all of our major markets -- semiconductor, flat-panel, solar, and medical. We are now experiencing strong increases in demand and all of our non-semiconductor markets.

Currently, 10% of our total revenue is derived from sales into the flat-panel, solar, and medical device markets. We anticipate that by the fourth quarter of 2008, 15% of our total revenue will come from sales into these rapidly-expanding markets.

Another major UCT strategic initiative is focused on continuing to expand our Asian-based operations. During this quarter, we increased our China-based revenue by 21% to 16% of total Company revenue. While this was short of our goal of 20% of total Company revenue, it represents major progress at our first Shanghai facility.

We also began initial production at our second facility in Shanghai, a new 80,000 square foot building in very close proximity to our first Shanghai building. This second facility is intended to support large module manufacturing, such as flat-panel test systems. We are also transitioning some of our machining capability to this new facility.

We anticipate initial third-party shipments from our second Shanghai operation to begin in the first quarter of 2008. Growing our base in China is key to enhancing our competitive position and improving our profitability.

Finally, we began remodel construction at our recently-announced 100,000 square foot facility here in Silicon Valley, which we planned to occupy starting late in the second quarter of 2008. This new facility will allow us to vacate our Menlo Park facilities and a significant portion of our South San Francisco facilities, centralizing both subsystem assembly operations under one roof.

The new facility will also serve as our headquarters office. We are confident that we will realize significant savings by centralizing our Silicon Valley based assembly operations in a single facility.

Looking ahead to next quarter, we project flat to lower semiconductor equipment industry demand, offset by growth in flat-panel and solar. We expect revenue for the first quarter of 2008 to range between $90 million and $97 million, and net income per share to range between $0.08 and $0.14. This EPS estimate includes an expected $0.01 per share charge for amortization of intangibles and a $0.04 per share charge related to SFAS 123R.

To summarize the highlights for the fourth quarter, UCT achieved revenue and earnings per share within our guided range in a challenging quarter for the industry. We received key new orders for new assemblies from Intuitive Surgical and Varian Semiconductor, and announced an expanded relationship with Photon Dynamics.

We grew our revenue in China by 21%, as a result of the successful transfer of a major product line from one of our US facilities, and began initial production at the second Shanghai facility, designed for machining and large module manufacturing.

In closing, we remain optimistic about our market position and 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 at JPMorgan.

This is [Joe Sang] for Jay Deahna. Quick question on your assumption for -- you mentioned currently 10% of your sales is in non-semi applications; and in Q4 that is going to go to 15% of your sales. What is your assumption on the semiconductor market for '08? What's the basis of that assumption?

We're actually anticipating a down year, as most analysts are. As you know, the range is quite wide, some from modest decline to some significant decline. We're sort of targeting the middle of that; and we think somewhere in the 10% to 12% decline range is what we expect.

But I would just like to reiterate that we believe that we will grow faster than the industry by approximately 10% to 15%, no matter what happens in the industry.

Okay, and also a follow-up on that is, a lot of the equipment buyers, some of them at least, have mentioned that they have optimism for the second half. Do you see that coming?

That is a little too far for us to project out. We really don't have that visibility that far out.

Okay, then and the last question I have is -- you mentioned that there is some churn at the last part of the quarter. Was there any significant push-outs or pull-ins? Is what that what you were referring to?

That is the kind of thing that we would be referring to, yes, push-outs and pull-ins. That is fairly common at the end of the quarter.

It was a little more significant than it has been in the past. The fact that we had a new ERP system made it a little more complicated for us to adapt to it.

We had also planned a shutdown, a two-week shutdown; and because of all the changes we ended up pulling in a lot of overtime and associated support work.

So as a net, would you say there is more pushes than pulls?

Net-net it was about what we expected.

Okay, all right, thank you.

(OPERATOR INSTRUCTIONS) Tim Summers, Stanford Group.

Thanks for taking my questions. Just a couple of things here. On the second China facility, Clarence, you suggested that that was going to be primarily for machining and for flat-panel test assembly.

Does that mean it is just dedicated to Photon Dynamics and the metal bending from Sieger?

Yes, what I meant to say -- what I think I said was machining and large module manufacturing. I was just using the Photon Dynamics as an example of large module manufacturing.

For example, elsewhere we do large CMP modules; those are good potential candidates to migrate to China. We believe there are some additional significant large module opportunities that we have in the wings that would make sense to do in that new facility.

And it will include the machining, too. But primarily large module manufacturing.

Just as a follow-up, you mentioned that by the fourth quarter of '08, flat-panel or non-semiconductor equipment could equal 15%. You mentioned what your anticipated growth of the semiconductor equipment business might be, or at least CapEx.

How do we model the growth or anticipated growth of markets outside semiconductor equipment?

I think you've got to take it one at a time, Tim. Flat-panel is on its own trajectory. I'd say this is more of a recovery from a previous strong period. It has declined as you know, and now it is returning back to higher levels.

Solar, I mean, modeling this is a trick; but we expect significant growth and expansion in that market.

The medical devices is really a separate model on its own. Our main customer there has demonstrated significant growth and consistent growth, and we see no reason not for that to continue.

Okay, great. Thank you.

Mr. Sexton, I show no further questions at this time, so I will turn the conference back to you.

Okay, I would like to thank everybody for joining the call. We look forward to seeing you at the end of our first-quarter conference call in April and/or on the road at one of our investor conferences. Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation, and we ask that you please disconnect your lines. Have a good day, everyone.