Ultra Clean Holdings Inc (UCTT) 2008 Q1 法說會逐字稿

Good afternoon and welcome to the Ultra Clean Technology First Quarter Financial Results conference call. I would now like to turn the call over to the Chief Financial Officer, Mr. Jack Sexton.

Thank you. 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 2008. The press release 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 one hour after the call's conclusion and will be accessible for two weeks. The dial in access number for this replay 888-561-5097 for domestic callers and 706-679-7569 for international dialers. The pass code is 42484125 for both domestic and international callers.

This call is also being web cast 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's 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 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 public forums such as a press release or a 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, consolidation of activities in the U.S. 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-K filed for the year ended December 28, 2007. 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 2008 was $92.4 million, effectively flat with prior period revenue of $92.8 million for the quarter ended December 28, 2007, and a decrease of 17% compared to revenue of $110.8 million in the same period a year ago. The sequential decrease was due to reduced demand from nearly all semiconductor capital equipment customers.

First quarter revenue was slightly below the midpoint of our guided range of $90 million to $97 million. Gross margin for the first quarter was 13.1%, up from 12.4% recorded in the fourth quarter and a decrease from 15.1% in the same period a year ago. The 70 basis point sequential improvement in gross margin is due to efficiency improvements as we adjusted to the difficult market environment and increased activity in our original Shanghai facility which has a favorable impact on our consolidated gross margin.

Operating expenses in the first quarter were $9 million, up less than $100,000 compared to prior quarter. The sequential increase of approximately $100,000 is due to a onetime FAS 123R charge related to the retirement of Leonard Mezhvinsky and increased rent expense associated with our new [Hayward] facility, partially offset by reduced outside services and other discretionary spending. Interest and other net expense of $344,000 was flat sequentially as lower interest income offset lower interest expense on reduced debt levels. This debt was originally put in place in support of the Sieger acquisition.

Our effective tax rate for the quarter and our estimate for the fiscal year 2008 is 29% as per the prior projection. The effective tax rate is up slightly from prior year due primarily to the effect of foreign operation as the impact of increased profitability in China is offset by an increase in the effective tax rate in China. As a reminder the effective tax rate in our first China entity moves from zero in 2007 to approximately 9% in fiscal year 2008, as a result of the transition of our tax holiday on that first entity.

Net income for the first quarter was $1.9 million, decreasing from net income of $2.1 million in the fourth quarter as $400,000 improved operating income was offset by a $600,000 unfavorable event in income tax provision. Our fourth quarter 2007 results included a $500,000 tax savings on the final year end provision.

Diluted earnings per share for the fiscal -- for the first quarter 2008 were $0.09 on a GAAP basis within our guided range of 8 to $0.14. The $0.09 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 first quarter, cash of $25 million decreased $8.4 million sequentially while third party debt decreased $0.8 million to $21.4 million. Taken together, cash, net of third party debt decreased $7.6 million during the period, due to the increased accounts receivable offset by net income and non-cash charges during the period.

Accounts receivable of $47.8 million increased $13 million or 37% due to slower collections as customers slowed payments at quarter end. Day sales outstanding increased 13 days to 47 days at the end of the first quarter. We are stepping up our collection efforts to return to normal levels of DSO, Day sales outstanding.

Net inventory of $48.4 million decreased $900,000 or 2% due to decreased decreased activity levels. Days inventory on hand calculated on a forward-looking basis increased to 77 days at the end of the first quarter as a decrease in projected activity levels is not yet reflected in reduced inventory level.

Accounts payable of $38.3 million increased approximately $1.4 million or 4% during the period. Day sales outstanding increased one day to 50 days.

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

Thanks, Jack. The first quarter of 2008 was another challenging period for the industry in which we saw a fourth consecutive quarterly decline in industry demand. As anticipated, UCT realized efficiency improvements compared to the fourth quarter of 2007 and benefited from a further transition to China, resulting in sequential increase in gross margin of 70 basis points on slightly lower revenues.

With respect to commercial and operational highlights during the quarter, we made progress on several fronts. First as was announced in our press release, we secured three significant new product orders from two existing major customers, including a new process module on a solar tool. Separately, we increased our non semiconductor revenue by 45% sequentially to 14% of total sales in the first quarter of 2008. This included shipping our initial turnkey flat-panel testers, to photon dynamics and also increasing our robotic medical device revenues by 9% sequentially.

Additionally, we increased the percentage of revenue derived from our Shanghai operations to 19% of total sales. And, finally, we made significant progress on our new facility in Silicon Valley.

I will now provide further details on these accomplishments. During the quarter, we secured three new orders from two existing key customers. From one major customer, we won a new process module award for a solar tool which is projected to have high usage beginning in the fourth quarter of this year. This module ships at the same production volume as solar gas delivery modules and will more than double our revenue potential on thin film solar lines. As with the solar gas delivery systems that we currently provide to the same customer, this newly awarded module will be manufactured in our Shanghai, China facilities and delivered directly to the customer in Asia. We anticipate shipping our first module in Q3 and to ramp to volume production in Q4.

A second order with the same customer is for an integrated process module for EPI applications. It contains a gas delivery system, frame assembly, precision machining assemblies, and electrical assemblies. This module is currently being built in-house by our customer and this order is an indication of their continued commitment to move toward outsourcing during the current industry slowdown.

The third order is with one of our oldest major customers. It is a new module assembly design similar in many respects to machining assemblies currently built in our south San Francisco facility. Incremental revenue from these three new product awards is estimated to be $3 million to $4 million in 2008 and $20 million to $30 million in 2009.

These new wins reflect continued success toward our stated objectives to grow faster than the semiconductor capital equipment industry, in part by increasing a portion of our revenue derived from the adjacent markets of the solar, flat-panel and medical devices industry.

Additionally, we continue to make progress on previously announced orders. We shipped our first turnkey tools to Photon Dynamics from our south San Francisco facility and remained on track to transfer production of these systems to our second Shanghai facility at the beginning of the third quarter of 2008. This will be a significant step toward our goal of achieving profitability in our new Shanghai facility in Q3.

During this quarter, we increased our China-based revenue by 14% to 19% of total Company revenue. We also began production level shipments from our second facility in Shanghai. This new facility opened in November of 2007, is an 80,000-square-foot building and in very close proximity to our first Shanghai building.

We intend to use this new facility for precision machining and large module manufacturing. The first modules produced in this facility will be large flat-panel inspection tools for Photon Dynamics. Subsequently we will manufacture the new solar subsystems announced earlier in this call at this site.

With these additions we are confident that we will achieve our goal of reaching profitability in this new facility in the third quarter of 2008. Growing our base in China is key to enhancing our competitive position and improving our profitability.

Also, I am pleased to announce that in the first quarter we increased our sales to the solar, flat-panel and medical device industries by 45% and they now represent 14% of our total sales. We anticipate further growth throughout 2008, particularly towards the end of the year. And we are now revising our goal of exceeding 15% of revenue from these sources by Q4 of 2008 to exceeding 20% of our revenue from these sources by Q4 of 2008.

In other areas, the remodel construction at our recently announced 100,000-square-foot facility here in Silicon Valley is proceeding on schedule. We plan to occupy this facility 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 facility, combining three assembly facilities into one.

The new facility will also serve as our headquarters office. We are confident that we will realize significant savings through this consolidation.

Finally, in response to slowing market conditions, we have completed another reduction in force in early April reducing our U.S.-based work force by an additional 7%. We believe this further streamline was necessary to oper -- optimize our operating effectiveness.

Looking ahead to next quarter, we project a significant drop in semiconductor equipment industry demand, partially offset by continued growth in the flat-panel solar and medical device markets. We expect revenue for the second quarter of 2008 to range between $67 million and $74 million, and net income per share to range between a loss of $0.03 and income of $0.03. This EPS estimate includes an expected $0.01 per-share charge for amortization of intangibles, a $0.03 per-share charge related to SFAS 123R, and a $0.02 per-share charge for employee severance payments.

To summarize the highlights for the first quarter, UCT achieved revenue and earnings per share within our guided range in a very challenging quarter for the industry. We received three new product orders from two existing major customers, including a new solar process module; and our pipeline of new products remains very strong.

We made significant progress on our recently announced order with Photon Dynamics. We grew our revenue in China to 19% of total revenue and we streamlined our business in preparation for yet another quarter of declining semiconductor capital equipment industry demand.

In closing, we remain optimistic about our market position, our flexible business model, 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). Edwin Mok.

Thanks for taking my questions and congratulations on these good non-semi business. Let me start with actually the non semi part. Baking into your guidance do you expect non semi to actually grow sequentially in the second quarter?

Yes it will.

So if you back that out, that means you expect your semi business to be down almost like 40% sequentially on the second quarter? (multiple speakers) a short-term event that may be going into third quarter you have a rebound? Or -- because that sounds lower than what some of your customers have reported for the coming quarter basically.

Sure. Let me comment on a couple of items there, Edwin. First, our projection is 23.7% down for the second quarter and so, yes, you're right. If we offset that by the growth in the non semi business that would, obviously, we are seeing greater than 24% decline on the semiconductor side, probably closer to 30%. But we have not lost any market share on the semiconductor side with any of our customers. So this is truly a reflection of what we are seeing in the market based on declining demand from our customers.

Great. Then for your non semi piece, you mentioned that you guys have won some business with existing customer. But and you talked about that piece growing, right? Is it growing just up in both or three customers that you have talked about before, mainly Photon Dynamics, Intuitive, and Applied? Or is it like one particular customer that would be carrying the growth in the second in the coming quarter?

In the coming quarter, it's a little bit of everybody. We have seen, as we said, sequential growth of 9% last quarter in our Medical Device, which is almost exclusively Intuitive Surgical. We are also seeing as we said ramping to volume production on Photon Dynamics; but the largest percentage of growth that we were probably see next quarter is going to come -- or at least starting in the third quarter is going to come from the new solar opportunities with Applied Materials.

Then circling back on this [semi] piece that you mentioned for you that baked into your guidance, right? Before you talked about these designed wins back in '07 and fourth quarter winning, right? And you summed it up that adds up to $50 million plus in terms of revenue, right?

Roughly, yes.

Do you think that number might be too aggressive? I imagine that number was already given by your customer. You think now that you look at that, that number might look a little bit too aggressive at this point in time?

Yes. You are exactly correct. So what's happened is, we were given those estimates by our customers. We are now qualified and shipping virtually all of those products. They are just shipping in significantly smaller volumes than we had originally anticipated and than our customers had originally anticipated. So it is probably about half of that revenue that we had originally projected.

Two more housekeeping questions. For the coming quarter do you guys expect to have some (inaudible) tax, given that you are guiding for (inaudible) or loss in the coming quarter? And what was the stock comp expense for the first quarter?

The stock comp expense was indicated at $0.04 per-share, Edwin. This is Jack. I missed the first part of your question. What sort of tax were you looking for?

Yes, so for the coming quarter you are guiding for partially having a loss for the coming quarter. I was wondering if there is a minimum tax that you have to pay for, given all your international operations or something like that that we should bake into our model?

No. There's no sort of minimum tax. We are targeting break even so, basically, a flat zero tax. There is no minimum tax that's baked in that you should bake into your model.

(OPERATOR INSTRUCTIONS) Jay Deahna of JPMorgan.

Good afternoon, guys. Couple of questions. Increasing your expectation of revenue from non semi to 20% in 4Q, how much is that a function of doing less semi versus more of the other or is it some sort of combination?

Obviously in Q1, we were flat with regard to Q4. So the increase that we saw this time is an absolute increase. In Q2 and Q3, we will -- in Q2, we will benefit from the revenue, total revenue being down. By Q4 although we certainly don't give guidance that far out, we would expect to be at or above our Q1 revenue. So the 20% should be on revenues at least as high as our Q1 revenues.

And remind me what non semi was in 1Q as a percentage of the total?

It was 14.

10% in Q4 and 14% in Q1.

Okay, and then you are saying 20% in the December quarter. So obviously there's a pick up there.

Right.

Let's see. On the new solar mandate, is that a gas delivery subsystem or something else?

It's something else. We are not allowed to say what it is yet, but it is something else.

And is that on a mainstream CBD system for thin film solar?

Yes it is. And it is used at the same -- there's the same volume usage as there would be for gas panel although the revenue is slightly higher than for gas panels.

Can you say if it is chamber-related or not?

No. It is not a chamber.

Great, and then on the EPI opportunity, is that an entire system that you are building or some sort of chunky subsystem that their customer was formerly building internally?

It's not a complete tool if that's what you mean, but it is a very major portion of the subset of the tool. And, yes, the customer was building that internally. Is still as of today building that internally and, yes, we think it is a very good indication. They've talked to us for a long time about outsourcing larger modules such as this; and this is the first move that we've seen in a while to actually do that.

So is this something you actually haven't built before, this type of module?

That's correct.

Now the gas delivery system does attach to this module. So we've built the gas delivery system that goes on to this module before.

So this is one of these super modules perhaps?

Yes it is.

Okay, and do you think there are more mandates like that as that customer increasingly does more outsourcing with their entire semiconductor-related product line?

Yes, I absolutely believe that's the case. They have indicated that they are moving more towards this merging transit model and more towards taking delivery of subsystems in Asia. As that occurs, then, we are going to be in a strong position to capture more of those submodules which they would like to have us manufacture in Asia.

Okay and then, last but not least, do you see more opportunities to do solar-related subsystems, whether it's from your existing customer or others?

There is significant opportunity with other customers. We are starting dialogue with other customers at this point. Obviously, the challenge is trying to figure out which ones are likely to be the most successful and work closely with them. But we do see significant opportunities with other customers. Additionally with the existing customer we think there's significant further additional opportunities once we prove ourselves on this second module.

Fantastic. Thank you, Clarence.

[Lynn Joaquin]. [Stockdot] Partners.

I had two questions. The first is could you break down the revenues -- the 14% of non-semi revenues between medical and flat-panel flash type [tech] roughly in terms of what person was medical versus non?

Yes, medical is going to be about 8% of the total. 8% out of that 14 is medical.

And when you get to 20, can you give us a rough percent of what medical should be?

It will increment up. The growth is not going to be the -- it comes primarily from the medical, but it will continue to ramp. It is on the verge of being 10% in the not-too-distant future.

And then, lastly, given the sequential decline in overall corporate revenues could the non semi revenue be greater than 20% in either the second or third quarter and then revert back to 20% in Q4 as the rest of the business ramps up?

That's not outside the realm of possibility.

[Jenny Noone] of JPMorgan.

What was your non-GAAP panel revenues for the quarter?

It's right around 50-50 right now, Jenny. It was 46% non gas panel last quarter; and we've grown it largely on the strength of this additional solar, flat-panel and medical device. So it's about a 50-50 split.

Where do you see that going to by the end of the year?

It will continue to grow. I mean, you can do the math. If we get to 20%, just assume that the process module stuff remains relatively flat and add in an additional 6 percentage points for this solar, flat-panel, and medical device. You know, you get to more of a 56% non-gas split.

Jesse Pichel of Piper Jaffray.

My questions have been answered. May I just fit in -- the solar win, is that a new tool outsourcing win or is that something that was done internally at your customers' facility?

Our customer was outsourcing this in relatively small volume, but it was being outsourced to a different provider, but they are expecting a huge ramp in this application. So they are not completely satisfied with the current provider; and so we've been given an opportunity to be either the second source or primary source, depending on how well we do in a performance.

But the volumes are relatively small and is at this point and they are expecting big growth in the next two quarters -- in Q4.

Actually a couple of your existing customers have big solar divisions. You think this could just the a significant tam for you?

Oh, yes. It appears to be a very large tam opportunity for us. It is hard to qualify because --.

That was my next question.

Yes, it's hard to quantify. What we're seeing is on some of these thin film solar lines, what we said is that when fully populated, they will utilize, the -- the CVD tools that we provide gas delivery systems on on these large solar lines when they are fully populated, there are four CVD tools with 7 process modules. Each process module utilizes a gas delivery system so there's 28 gas delivery systems on a complete line and those have an ASP of about $50,000.

So it is about $1.4 million current revenue opportunity for us for a complete line. With this new module, it is more than doubling. So it's probably going to put us up around $3 million revenue opportunity per line or slightly higher.

Edwin Mok of Needham & Company.

First question I have is on the Shanghai. You mentioned that you expect to achieve product profitability by the third quarter. Can I ask what revenue levels you need in that facility?

Yes. That's based on about $3 million, a little less than $3 million of revenue in that quarter.

(inaudible)

That we expect to ramp to eventually $6 million or $7 million by the fourth quarter of this year.

Did you catch that? It was $3 million.

So your current revenue level is $3 million?

No you asked -- Q3, when we are making money what level of revenue and I said that we will be making $3 million at about particular facility in the third quarter.

Roughly $1 million a month (multiple speakers).

$3 million out of the second facility that you have in China, then, right? (multiple speakers) Thanks for clarifying that.

The second question I have was on accounts receivable. It was up quite a bit this quarter and you mentioned that it is due to slow collection. Do you expect it to stay at this level given the challenging environment in (inaudible) right now?

No, Edwin. That's a good question. What we saw at the end of the first quarter which, again, is preceding this very steep drop in Q2 is a lot of customers sort of hoarding cash and being a little bit reluctant to finalize payments toward the quarter end. So between redoubling our efforts in that area and we just think that the customers aren't going to be as, say, grasping and holding on to their cash at the end of the next quarter. We think we will be able to improve significantly from the DSO we hit at the end of Q1.

Great. So it sounds like you are getting to a stage more than just the one quarter event, anyway, right?

Yes and a little bit, just, everybody said things were heading into a tough quarter and the second quarter, let's show as much cash as we can on our balance sheet. And we had a tough time getting all the questions that we normally get at the end of the quarter.

And finally, inventories, given the drop in revenue level any risks on the inventory that you are holding on hand right now?

Another good question, Edwin. Basically, the three U.S. facilities are our (inaudible) south San Francisco facility, all dropped nicely in line with the reducing demand. We had a little bit of an increase in inventory in our two largest growing entities or facilities. One is in Asia where we have some core gas product that was purchased in -- basically we didn't reduce as quickly as we would have liked given the quick decline and demand. That is very reusable inventory that we are not worried about using.

And the second increase in inventory was in South San Francisco which is seeing a nice, pretty solid continued demand in that facility. And they've got a couple of new product lines particularly in flat-panel and the new PDI opportunity, which is also flat-panel.

So it's a combination of that, the new inventory for those two new projects and just robust demand there that caused that facility to increase. So to answer your question, no. We're not concerned that we won't be able to use the inventory that's there. It happens to be in our two entities that are -- our facilities that are growing the most.

(OPERATOR INSTRUCTIONS). Adam Mizel from Aquifer.

Could you help a little bit with all the moving pieces, realign or give us a view of what to think of this Company looking like in a more normal cyclical environment? Because I listen to what you are describing. There's a lot of expansion of business in solar, the expansion of business and process modules, and a lot of that in medical devices and other nongas things. It is hard to see what all that will look like six, 12, 18, 24 months down the road when the world becomes more normalized because it is being obscured by the cyclical downturn.

So when you look out and say to investors they should think of this Company in some environment that isn't cyclically high or low, what does it look like in terms of revenues, earnings? Because it is very hard now to put that together. And anything you do to help would be valuable.

Sure, that's a good point. If we go back to Q1 of '07 which is we did $110.8 million. We have added significant new contracts on top of that. So if the industry were to return to that sort of demand level, we think we would be in the $130 million to $140 million range just with the business we have already brought on. And then what we see as more normal activity levels and there we think we approximate 18% gross margin, about 11.5% operating margin.

One interesting point that your question kind of draws out is this downturn in Q2 and the need to get very lean and we are -- Clarence highlighted the fact that we went through a major reduction in early April. So we are getting very lean operationally -- is effectively good for the business in a sense that you become very efficient and then, with that subsequent return to growth in the industry, the profit falls through at very healthy levels. That's what we saw following the Q3 '05 downturn. And we expect to see the same as we come out of this most recent downturn.

I'd like to elaborate on that. So, again, this is strategically what this Company has done numerous times in the past. We've seen downturns and downturns like this is a tremendous opportunity for our customers to migrate to more outsourcing. You see us capture new wins; and so what we are doing is we are streamlining our operations as we have in the past. We are consolidating facilities. We are increasing our revenue out of our China operations. We are increasing our China facilities. We are reducing our headcount.

So we are taking all the actions to streamline our operations. And as the industry comes back and as we broaden into other industries, we expect to see a dramatic slingshot affect and catapulting us to significant profitability going into the future. So we are very -- this is exactly in line with our strategic philosophy and our strategic direction. It has worked for us numerous times and as the industry grows and as we expand into other industries, we see this happening again in the very near future.

(OPERATOR INSTRUCTIONS). There are no further questions at this time.

I would like to thank everybody for joining the call and remind everybody that we are on the road. We will be at the Cowen conference in late May. We will also be at the JPMorgan conference in Boston also a little bit earlier in the month of May.

I remind everybody that we do like to speak to investors throughout the industry cycle. We think there is a lot to learn and communicate in both directions, whether the industry is in a downturn or an upturn. So we look forward to seeing you on the road and thank you again for joining the call. Operator, back to you.

This concludes today's conference call. You may disconnect your lines.