Ultra Clean Holdings Inc (UCTT) 2008 Q2 法說會逐字稿

Good afternoon. My name is Rachel and I will be your conference operator today. At this time of like to welcome everyone to Ultra Clean Technology second-quarter financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks that will be a question-and-answer session. (OPERATOR INSTRUCTIONS).

Joining us today is Mr. Jack Sexton, Chief Financial officer; as well as Clarence Granger, Chairman and Chief Executive Officer. I will now turn the call over to Mr. Sexton. Sir, you may begin your conference.

Thank you Rachel. 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 2008. The press release can be accessed from the investor relations section of Ultra Clean's website at UCT.com. In addition, we've 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 888-561-5097 for domestic callers and 706-679-7569 for international dialers. The past code is 55630779 for both domestic and international callers. 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 investor should accept the contents of this call the Company's official guidance for the third 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 forum such as a press release or publicly announced conference call. The matters 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-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 second quarter results.

Revenue for the second quarter of 2008 was $67.4 million down 27% from the prior period revenue of $92.4 million and a decrease of 36% compared to revenue of $104.7 million in the same period a year ago. The sequential decrease was due to an industrywide cyclical reduction in demand affecting all semiconductor capital equipment customers. Second quarter revenue was at the low end of our guided range of 67 to $74 million.

Gross margin for the second quarter was 11.2% down from 13.1% reported in the first quarter and a decrease from 15.1% in the same period a year ago. The 190 basis point sequential reduction in gross margin is due to the impact of lower volume on factory utilization partially offset by cost reduction measures taken during the period.

Operating expenses in the second quarter were $8.2 million down approximately $900,000 compared to prior quarter. The sequential decrease is due to strict cost-cutting measures including the impact of reductions in force carried out in February and April of this year as well as factory and office shutdowns during slow periods. This was partially offset by approximately $400,000 in employee severance costs and $300,000 in increased costs associated with the move to our New Hayward facility.

Redundant rent charges incurred during the period of approximately $200,000 bring the total reduction in force and facility consolidation charges to approximately $900,000 during the period.

Interest and other net expense of $246,000 was down 29% sequentially due to lower interest charges on reduced debt levels. This debt was originally put in place in support of the Saegar acquisition.

The severe reduction in demand during the period resulted in a pretax loss of $909,000 parsley offset by a tax credit of $747,000. The 82% tax rate for the period increased from prior periods due to the impact of our foreign operations and the near breakeven level of earnings for the period. We continue to model 29% effective tax rate on a go-forward basis.

Net loss for the second quarter was $162,000 decreasing from net income of $1.9 million in the first quarter and decreasing from net income of $5.1 million in the same period a year ago. Diluted loss per share for the second quarter 2008 was $0.01 on a GAAP basis within our guided range of between a loss of $0.03 and income of $0.03. The $0.01 loss per share includes a $0.01 per share charge for amortization of intangible assets related to the Saegar acquisition and a $0.04 per share charge related to SFAS 123R.

Turning the balance sheet, during the second quarter cash increased $7.6 million sequentially to $32.6 million while third-party debt decreased $800,000 to $20.5 million. Taken together cash net of third-party debt increased $8.4 million during the period due to decreased working capital and positive EBITDA.

On a related matter, as announced in our earnings release, management has recommended and the Board of Directors has approved a share repurchase plan of up to $10 million of the Company's common stock. The plan is expected to be initiated at the opening of the Company's trading window as established in our insider trading policy which is after the close of markets on Wednesday July 30.

Accounts receivable of $26.6 million decreased $21.1 million or 44% due to improved collections and lower revenue during the period. Day sales outstanding decreased 11 days to 36 days at the end of the second quarter.

Net inventory of $43.6 million decreased $4.8 million or 10% due to decreased activity levels. Days inventory on hand calculated on a forward-looking basis increased one day to 78 days at the end of the second quarter.

Accounts Payable of $22.6 million decreased approximately $15.7 million or 41% during the period. Days payable outstanding decreased 10 days to 40 days. Now Clarence will discuss our operating highlights for the second quarter and provide guidance for the third quarter of 2008. Clarence?

Thanks Jack. The second quarter of 2008 was characterized by a 27% drop in revenue due to declining demand in the semiconductor capital equipment industry. Our revenue was down 39% from peak first quarter 2007 levels.

While this level of decline is painful, it is not unusual for a semiconductor capital equipment downturn. As in the past, UCT who utilize this as an opportunity to streamline our operations and to capture new outsourcing opportunities so that when industry does return begin to recover we can return to a faster growth rate than the overall industry.

During the quarter, we exercised our flexible business model to dramatically cut costs in all areas. Among other actions, this included a reduction in our US-based workforce of approximately 7% and 16 factory shutdown days during slow periods.

This was a significant factor in our ability to hit the low-end of our guidance range despite continuing declines in industry demand. We also continued our transition of products to China and finally we continued to capture new outsourcing opportunities in the flat-panel and solar subsystems markets.

With respect to commercial and operational highlights during the quarter, as was announced in our press release, we secured two significant new product orders from two existing key customers. Both awards are for next generation products and both are in markets outside of semiconductor mainly in solar and flat-panel. We also increased our non-semiconductor revenue by 18% sequentially to 22% of total sales in the second quarter.

Additionally we began ramping production in our second Shanghai facility and achieved profitability there in June. And finally, we executed on our plan to consolidate facilities in the Silicon Valley. I'll now provide further details on these accomplishments.

During the quarter we secured new awards from two existing key customers. From one major customer we've been contracted to design and build a next generation gas-abatement system for a solar tool. This is the next generation of the solar process module award announced in last quarter's earnings release. We remain on schedule with the delivery plan discussed in our last call and have already shipped our first qualification module.

Deliveries of the most recent next generation award are expected to begin in 2009. Winning the design work for future generation products is a critical part of our business model and further strengthens our customer relationships.

The second new product award is from Photon Dynamics. They have awarded UCT the production build of turnkey Gen-8 systems. Gen-8 is their most recent generation flat-panel test system.

Additionally, during the quarter we shipped them our first production units of turnkey Gen-5 tools. This new opportunity demonstrates continued growth in our supply relationship with Photon Dynamics which began at the end of 2007.

Incremental revenue from these two awards is estimated to be 6 to $8 million in 2009 and both will be manufactured at our new Shanghai facility. These wins reflect continued progress in our objective to grow faster than the semiconductor capital equipment industry in part by increasing the portion of our revenue derived from the adjacent markets of the solar, flat-panel and medical device industries.

During the quarter, sales to these markets increased by 18% and now represent 22% of our total revenue up from 10% of total sales in the fourth quarter of 2007. Included in this increase was 6% revenue growth in our medical device products. We expect that revenue from all non-semiconductor sources will continue to grow on an absolute basis and as a percentage of our revenue.

In our China operations, during the month of June we generated a profit from our second Shanghai facility only seven months after its opening in November of 2007. This new 80,000 square foot facility houses our China based precision machining and large module manufacturing capability and is the site for manufacturing all Photon Dynamics subsystems and complete turnkey tools as well as the two solar gas-abatement awards previously discussed. Growing our base in China is key to enhancing our competitive position and improving our profitability.

In other areas, we have moved our Menlo Park based production, engineering and SG&A staff into our new 100,000 square foot facility in Hayward, California as planned. Our Menlo Park facilities were completely vacated by the middle of July.

The assembly portion of our the South San Francisco facilities will be transferred to the Hayward facility in August completing our plan to centralize all Silicon Valley based subsystems assembly operations and our headquarters office under one roof. We're confident that we will over time realize significant savings through these consolidations.

Transition costs associated with this move were $0.02 per share in Q2 and are projected to be another $0.02 per share for Q3. These costs are expected to cease by the beginning of Q4.

Looking ahead to next quarter, we project a further decrease in semiconductor equipment industry demand partially offset by continued growth in the flat-panel, solar and medical device markets. We expect revenue for the third quarter of 2008 to range between 60 and $66 million and net loss per share to range between $0.03 and $0.10 on a GAAP basis. 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 completing the final stages of relocation and centralization into our Hayward facility.

To summarize the highlights for the second quarter, UCT achieved revenue and earnings per share within our guided range in another very challenging quarter for the industry. We received new product awards from two existing key customers and our pipeline of new products remains very strong. We transitioned to profitability in our new China facility 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, Needham & Co.

So the first question is just a housekeeping question. How much of your revenue came from the China facility in the past quarter?

So 19% came from our two China facilities which is flat with prior quarter as a percent of revenue.

So my understanding is that China is doing your non-semi gas panel as well as the Photon Dynamics too. Why is that flat sequentially in terms of percentage of revenue? That implies you actually have lower revenue from China, right?

Well the start of that really is just the Photon Dynamics. We haven't yet started the gas-abatement products that we spoke about in real volume. So we did have a little bit of an increase in our PDI activity and this was offset by a slight decline -- a moderate, very slight decline elsewhere. But otherwise the China activity moved in concert with the rest of our activities.

And from a general traction standpoint, we are having transitional analysis and work done of course on setting up for the Gen-8 and the extension of our Photon Dynamics relationship and of course getting ready for these gas-abatement tools we spoke about. So there's a lot going on out there. It just happens that it's basically flat as a percent of revenue in this period.

I see. And you mentioned that -- I imagine that's the reason why you have a bigger tax credit than you had expected because you were (multiple speakers)

Correct (multiple speakers). When the number gets so close to a breakeven point as we are this quarter, percentages become much less meaningful than they do in normal instances. So a relatively small difference in the tax jurisdictions in which we operate in terms of the tax charge and credits can create a large percentage movement.

I see. Based on your guidance for the September quarter, it seems to imply that you would still have this kind of higher than normal tax rate? Is that a correct assessment?

As I indicated in the text, we are guiding 29% effective tax rate. So on a go forward basis you can use 29%. It could very well be that because of the low levels of loss/profit during these periods where we are very close to breakeven that the percentage is skewed but for modeling purposes I suggest you remain with 29%.

Okay, right. And then one more question regarding next quarter guidance. Based on your guidance then it seems to imply you expect a slightly lower gross margin just from fixed cost absorption. Is that correct?

Correct, there is a bit of a volume impact. The midpoint of our guidance range is $63 million and of course there is a bit of a fixed cost impact reducing our margin to about 10.5% at that midpoint.

Great, that's all I have for right now. Let me just let the other guys go on.

Jinhy Yoon, JPMorgan.

Just a couple of quick questions. Clarence, you said EPS guidance for next quarter -- is that a $0.03 to $0.10 loss or is that a $0.03 to $0.10 profit?

No, $0.03 to $0.10 loss.

Is the $0.02 charge that is included for the move, does that also include any sort of additional employee severance costs if you have any more coming next quarter?

No, there's no additional severance cost included in that number.

Okay, but you had some I guess last quarter right?

Correct, I indicated in the text $400,000 approximately.

What is your EPS for the June quarter excluding the restructuring and the moving costs? Can give us that?

Sure, if you take the midpoint of the guidance range, you're right around $0.06 per share and if you take out the $0.02 per share moving cost you're down to $0.04. And then the other costs -- of course we've got the $0.01 per share for the amortization of intangibles and the $0.04 per share for FAS 123R. Was there one more level you wanted to (multiple speakers)

I was thinking for the June quarter what you reported (multiple speakers) sorry about that. You guys reported negative $0.01 for the June quarter and then I was just wondering if I pull out the employee severance cost of $400,000 and the moving cost of $300,000 and the duplicated rent of $200,000, where does that get you for like an operating number?

So you basically add back $0.03 to that $0.01 loss.

Okay, got you. And then, did you guys give your percentage of gas panel versus non guess panel (inaudible)

Yes, the non-gas has increased to 55% of total from 50% last quarter.

Again that's primarily a function of the decline being mostly in the semiconductor side. All of our non-semiconductor is non-gas -- or most of our non-semiconductor is non-gas panel. So since we had growth, we had 18% growth in the non-semiconductor side most of which was non-gas panel so that's why the non-gas panel increased to 55%.

(OPERATOR INSTRUCTIONS) Jay Deahna, JPMorgan.

Every quarter you guys announce new mandates and that's been going on for quite some time. I'm just kind of curious, if you look back over the mandates that you've announced over the last six or seven quarters have most of the mandates ramped to your expectations in terms of dollar volume? Have any not ramped at all or been huge disappointments? Have any been better than expected? And then I've got a follow-on from there.

Sure, Jay. This is Clarence. Yes, you know obviously we did -- we have taken a look at that and of the announcements that we made last we actually announced eight project wins last year. Of those, seven of them have come to fruition. And what we had expected was the range of those would be somewhere between 40 to $60 million in incremental revenue.

I would say -- most of these are new products for our customers and I would say of the projected revenue we've probably seen one-fourth of what they had originally projected. So it was more on the order of $15 million instead of the 40 to $60 million that our customers were projecting at the time that we received the awards or actually started getting qualified.

So we're now qualified on seven of those eight projects that we announced last year. As they start to ramp, as we o start coming out of this downturn we should do very, very well. We also have announced five projects this year with revenues ranging in 2009 between 26 and $38 million. And obviously we're just at the very early stages of shipping some of those but we're on schedule with every single one of those.

So between what we talked about in -- projected for 2008, when we talked about it in 2007 and 2009 we're talking somewhere between 70 and $100 million of potential incremental revenue and we have -- we're on track with all of those except one project. So when the industry comes back, we should be very well-positioned to see significant growth.

So the thesis has been as you scale into new projects grow your non-semi business that you can deliver this consistent 15% premium in the wafer fab equipment industry. But it sounds like what you're saying is that your new mandates are dependent upon your customers ramping new products and that's a lot harder to get done in a downturn which is why your downturn protection from new mandates is not as good as your upside (inaudible) if you will.

Unfortunately as I said, as you are paraphrasing, these new mandates, we've won them. Our customers are very pleased with us but the volumes particularly on the ones that are brand new products to the marketplace simply haven't materialized. So, I guess to some extent what you're saying is true.

There's a little bit less protection but again we tend to have this whipsaw effect. In the downturn we do tend to suffer a little more but in the upturn we also see a tremendous growth.

Okay and based on your mandates year-to-date, in theory what I tend to hear is that in a downturn environment you have more time to get attention from the customer. They can focus on changing the way they do things as opposed just grinding out the next unit because there's high demand and that you would have a bigger opportunity to get new mandates to potentially ramp into, into the next up cycle.

It sounds like what you were saying a few minutes ago that the dollar value of your mandates to date actually shows a little deceleration versus last year. Is that correct or is it just too early in the year to make that conclusion?

Yes, I absolutely wouldn't say that, Jay. We have -- what happens again is when things get really slow like this is when our customers put a lot of these new mandates -- start the process on these new mandates. So I would expect us to be able to talked about some other new things in the future that are going to continue to scale that growth. So I don't see -- we have quite a few projects in the pipeline that have not been awarded but that represent excellent growth opportunities.

Okay, then the last question is a little bit of a loaded question. If I asked you this question at any point in the last six quarters, the answer would've been wrong. But I will ask it again.

At what point in the not too distant future do you see some level of stabilization in your semiconductor equipment business such to the point where your new mandates in your non-semi business can drive sequential growth? I mean when semi equipment gets to zero I guess that can happen but we know that's not going to happen. (inaudible) here. But seriously do you feel like you have any better feel for that now than you have at any point in the last two or three quarters or is it still too hard to call?

Well, I guess Jay I mean I thought we had a good understanding of the situation a couple of quarters ago and I thought we were seeing stabilization and obviously that turned out not to be the case. Obviously the rate of decline that we're talking about in this coming quarter is less than the rate of decline that we have seen.

Our customers do seem to be getting a little more optimistic about what is going to happen in Q1 or the end of the year or in Q1 but obviously we're not giving guidance that far out. I certainly think that we are clearly getting to very, very low levels in semiconductor capital equipment certainly on the order of what we have seen before in 2005. So I would hope we're getting very, very close the bottom and as we approach the bottom then obviously the other mandates have a huge impact.

And here is the absolute last question. The most recent weakness or downtick that you have seen in your forecast from your semiconductor equipment OEM customers, have they been attributed to the recent weakness that has been publicized in expected NAND flash CapEx specifically from Samsung or Toshiba or has tat yet to filter down to you?

No, the most recent downturn we have seen has been very recent, I would say within the last few weeks and so the general information you're talking about I would expect has been already included in that data.

Edwin Mok, Needham & Co.

First one is on non-semi. Last quarter you guided that your non-semi would exceed 20% (inaudible) your revenue for this year. Given that you have growth this past quarter and you're guiding for higher growth do you care to give more update on that estimates there?

As we indicated it's 22% this quarter. So you've got two dynamics. You've got an absolute growth in that business which we think will continue to grow. In this most recent period it grew by 18% and the steady growth in flat-panel and medical device, the growth with the respect to solar is really -- could be much larger than that. That is to be seen.

And the offsetting movement in there is when the semiconductor does recover and comes back, the percentage of non-semi will come down as a result of that growth. So we don't want to get too tied up in what it is as a percentage. It will continue to grow in absolute. In the very short term it's going to continue of course to grow as a percent of revenue.

But once that semiconductor kicks in and it starts to really growth, it could well shrink as a percent revenue. But nevertheless, this 20% benchmark is something we want to -- we don't want to commit to it every quarter but it's something that we will eventually be comfortable hitting all the time and then growing beyond -- after that.

Edwin, to give you some idea in absolute dollars, maybe that's a little easier. So at the end of the year in Q4 we were doing revenue of around $92 million so 20% of that would've been about $18 million.

This last quarter we did over $14 million in revenue from the sources and so we're still projecting over $18 million by Q4 somewhere in the $20 million range. I'm comfortable that it will be continuing to grow and maybe even more dramatically than that. But that gives you an order of magnitude dollarwise we're talking about something in the 18 to $20 million range.

That's very, very helpful. And then the second part on the semi side of your business have you guys seen any incremental pricing pressure given how tough that market is right now? (inaudible) your customers squeezing you guys a little bit on that side?

No, we don't see any more pricing pressure than we normally see. There is -- our customers are ongoing negotiating with us and working on designs that will allow cost reduction and we do the same with our suppliers on a continuous basis. So I don't expect to see significantly greater cost pressure or margin pressure associated with targeted price reduction.

Great, that's all I have. Thanks.

Jay Deahna, JP Morgan.

Hey Clarence. Two more questions. The first one is have you built or are you building any gas panels or other subsystems for 450 mm systems?

You said there were two -- well the answer to that question is no.

Okay and then the second one is we all know that Applied has had a very strong surge in orders for flat-panel equipment from the January quarter through the July quarter and it's poised to taper off. They've stated that publicly. So if you just look at the normal cyclical nature of flat-panel display and the fact that there's about nine-month lead times, there's obviously going to be a lump in the snake for your business for flat-panel.

Now as we look into next year, do you think that the growth in the (inaudible) silicon solar will be consistent and steady enough to drive an overall growth in your combined flat-panel and solar business? Or will the falloff in solar create a dip -- mean in flat-panel create a dip for the two combined, if you get a sense as to what I'm saying?

No, I understand exactly what you're saying. So obviously we factored in a decline in flat-panel into our projections going forward for the balance of the year. And with the awards that we have received, the incremental awards that we've now received in flat-panel from Photon Dynamics, we think that will help mitigate some of the downturn that we expect to see elsewhere in our flat-panel business.

But on top of that we expect to see significant growth in the solar side not only with the gas delivery systems that we're currently providing but also with the gas-abatement systems that we have been awarded some business on. So we expect the solar opportunity to significantly outgrow any decline that is protected in the flat-panel side.

I see and do you actually see a peak quarter for flat-panel followed by some down quarters? Or as you kind of ramp down the gas panel production for Applied and ramp the Photon Dynamics system business which the larger ASP per unit, do you actually think that flat-panel can grow quarterly for the next year, year and a half or do you actually see sort of a peak and then a period of decline before it comes up again?

I think it is going to relatively flatten out based on the decline of the one and the increase of the other. I don't think we will see a big drop-off but I don't think we will see it more than offsetting the decline in the gas panel side.

And when would that happen? Is that like a Q4 or a Q1 thing?

Yes, it's more like Q4/Q1.

So Q4 would be kind of the peak of the subsystem business (multiple speakers)

Of the gas panel portion.

Okay great. Thank you.

(OPERATOR INSTRUCTIONS) Jesse Pichel, Piper Jaffray.

This is (inaudible) for Jessica Pichel. I just want to know what your stock based compensation was during the quarter.

It was about $1 million.

$1 million, okay and also could you give us a sense of the kind of demand you're are experiencing specifically in relation to your (inaudible) business for your gas-abatement tools?

Sure, this is Clarence. We are at the very early stages of that. So what we said was we shipped our first prototype module actually just recently. It didn't achieve revenue recognition in Q2. That's a Q3 revenue recognition. So we anticipate to see very good growth in that starting in late Q3 and early Q4.

(OPERATOR INSTRUCTIONS) Mr. Sexton, there are no further questions at this time. Do you have any additional or closing remarks?

Yes, I would like to thank everybody for joining the call and once again encourage each of our investors and (multiple speakers) to join us on the road. We are doing a bank sponsored (inaudible) roadshow. The first full week of August we will be on the East Coast and look forward to seeing as many investors as we can. Again, thanks for the call and we will speak to you next quarter.

This concludes today's conference call, you may now disconnect.