Ultra Clean Holdings Inc (UCTT) 2008 Q4 法說會逐字稿

Good afternoon. At this time, I would like to welcome everyone to the Ultra Clean Technologies fourth quarter financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions). Joining us today is Mr. Jack Sexton, Chief Financial Officer, and Mr. Clarence Granger, Chairman and Chief Executive Officer. I will now turn the call over to Mr. Sexton. Sir, you may begin your conference.

Thanks, Christy. Good afternoon, everyone, and welcome to our fourth quarter financial results conference call. My name is Jack Sexton, Chief Financial Officer of Ultra Clean, and with me today is our Chairman and Chief Executive Officer, Clarence Granger. 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 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 is 800-642-1687 for domestic callers, and 706-645-9291 for international dialers. The pass code is 82608074 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 content of this call as the Company's official guidance for the first quarter of fiscal 2009. Investors should note 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 & Exchange Commission, including our most recent Form 10-K filed for the year end December 28th, 2007. The Company disclaims any obligation to publicly update or revise any such forward-looking statements or to reflect the events or circumstances that occur after this call.

Now here are the fourth quarter results. Revenues for the fourth quarter of 2008 was $47.1 million, down 22% from the third quarter revenue of $60.1 million and a decrease of 49% compared to revenue of $92.8 million in the same period a year ago. The decrease in demand was due to the continued industry-wide cyclical reduction in demand affecting all semiconductor capital equipment customers, partially offset by growth in our non-semiconductor business.

Semiconductor revenues declined $13.3 million or 32% sequentially. Non-semiconductor revenues including sales within the medical device, flat-panel display, and solar industries increased $800,000 or 5% sequentially to $19 million. Gross margin for the fourth quarter was 0.9%, down from 9.1% recorded in the third quarter and a decrease from 12.4% in the same period a year ago.

The 820 basis points sequential decline in gross margin breaks down as follows. Approximately 380 basis points are due to factory absorption variances due to lower volume. Approximately 210 basis points are due to mix-related margin declines which we expect to be temporary. Approximately 110 basis points are due to facility centralization and closure costs. And approximately 80 basis points are due to employee severance charges.

On completion of our annual impairment testing of goodwill and other long-lived assets, using the methodology prescribed by statement of financial accounting standards Numbers 142, and 144, we determined that the Company will incur a fourth quarter non-cash charge to goodwill and other long-lived assets of approximately $48 million. This charge is net of $7.1 million in tax, and relates to the impairment of assets associated with our Seiger acquisition. The earnings per share impact of the charge is $2.26 per share.

Operating expenses, inclusive of the previously described impairment charge, were $62.9 million. Exclusive of this charge operating expenses were $7.9 million, up approximately $100,000 compared to prior quarter. The sequential increase reflects approximately $200,000 in increased year-end compliance charges, approximately $300,000 in charges associated with our ERP implementation in China, and approximately $200,000 in employee severance costs, offset by approximately $600,000 in reduced employee compensation. Interest and other net expense of $45,000 was down approximately $200,000 from prior quarter, due to prior interest income on government reimbursements offsetting interest expense related to third-party debt. This debt was originally put in place in support of the Seiger acquisition.

The GAAP pre-tax loss, inclusive of the impairment charge, was $62.5 million. Exclusive of this charge, the pre-tax loss for the period was $7.5 million, partially offset by a tax benefit of $3.6 million. The 45% effective tax rate for the period benefited from the effective -- affect of foreign ration operations on our tax rate. We are projecting a 35% effective tax rate on a go-forward basis.

Net loss for the fourth quarter was $52.2 million on a GAAP basis. Excluding the impairment charge, net loss was $4.1 million moving unfavorably from the net loss of $1.9 million in the third quarter and net income of $2.1 million in the same period a year ago. Loss per share on a GAAP basis was $2.45 per share. Excluding the impairment charge, the fourth quarter 2008 loss per share would have been $0.19 per share, inclusive of a $0.01 per share charge for amortization of intangible assets related to the Seiger acquisition and a $0.02 per share charge related to FFAS 123 R.

The $0.19 loss is $0.01 favorable to our revised guidance of between $0.20 and $0.23 loss per share, due to higher than expected tax recovery, and $0.03 below the low end of our original loss guidance per share. After adjusting for $2.4 million in one-time charges, the cash break even in the fourth quarter was approximately $57 million, down from $60 million Q3. With additional headcount reductions, both planned and taken, we are confident we can decrease this to $35 million by the third quarter of 2009.

Turning to the balance sheet. During the fourth quarter, cash increased $1.1 million sequentially to $29.6 million while third-party debt decreased $1.3 million to $18.5 million. Taken together, cash, net of third-party debt increased $2.4 million during the period, as working capital reductions more than offset the operating loss. The net increase would have been $4.6 million if not for the $2.2 million cash outflow related to the share repurchase program which was discontinued in mid-October.

Other key developments in the area of liquidity include our filing for a $6.5 million US Federal tax refund which we expect to receive in early April 2009. Additionally, we extended our revolver loan agreement and added a $3 million term loan with Silicon Valley Bank. Both facilities mature in January 2012. Accounts receivable of $13.8 million decreased $15 million or 52% due to lower revenue and accelerated year-end collections.

Days sales outstanding decreased 18 days to 25 days at the end of the fourth quarter. Accounts payable of $11.3 million decreased approximately $16.9 million or 60% sequentially, due to significantly reduced purchases at quarter end. Days payable outstanding decreased 26 days to 21 days.

Net inventory of $39.8 million decreased $9.2 million or 19%, as we burned off the inventory increase of last quarter, which was associated with the move of production to Hayward and new product introductions in China. We expect to decrease inventory by another 8% during the first quarter of 2009. Days inventory on hand calculated on a forward-looking basis increased 87 days to 192 days, due to lower-projected demand in the first quarter of 2009.

Now Clarence will discuss our operating highlights for the fourth quarter and provide guidance for the first quarter of 2009. Clarence?

Thanks, Jack. Semiconductor capital equipment demand declined even faster than anticipated in the fourth quarter of 2008 with end-user demand now limited to next generation technology and maintenance purchases only. Our OEM customers are also focused on reworking their existing sub system inventory whenever possible to fulfill their limited system orders.

In this very challenging market environment, we are focused on decreasing our cost structure while meeting our customer's outsourcing needs. Although we achieved our restated guidance for both revenue and non-GAAP EPS, we missed our original EPS guidance for the first time in four years. This miss was due primarily to underabsorption of overhead in a declining market. In my commentary, I will focus on the actions we have taken, and those we plan to take in order to streamline our operations and reduce costs.

During the quarter, we continued to increase our non-semiconductor revenues in the flat-panel, solar and medical device markets, partially offsetting significantly lower revenues in semiconductor capital equipment. Total non-semi revenues increased by 5% to $19 million or 40% of total revenue in the quarter. We also increased the percentage of revenue from our China operations by 2 percentage points to 26% of total sales. And finally, we concluded a supply agreement with FEI Company to manage manufacturing services for their North American operations. We expect this agreement will generate incremental revenues of between $10 million and $15 million in 2009, and between $20 million and $30 million in 2010.

I'll now give further details on these actions and accomplishments. Due to the severe industry decline and certain year-end tax considerations, we accelerated our consolidation plans in the fourth quarter and transferred more US-based production to our Hayward, California manufacturing facility. In conjunction with this, we closed our Portland, Oregon, and Sacramento, California manufacturing facilities, and downsized our south San Francisco machining center.

We decreased our US-based workforce by 110 employees to 556 employees, bringing the fiscal year 2008 reduction to 32% of the US workforce. In January, 2009, we reduced another 131 US-based employees and we anticipate a further reduction later in the first quarter. Additionally, we took 13 shutdown days in the fourth quarter, and have planned 20 shutdown days in the first quarter of 2009. These actions to reduce our cost structure and lower our breakeven are central to maintaining a strong cash position.

Cash, at the end of the fourth quarter was $29.6 million, an increase of $1.1 million from $28.5 million at the end of the third quarter. Third-party debt at the end of the fourth quarter was $18.5 million, a decrease of $1.3 million from $19.8 million at the end of the third quarter. In the fourth quarter, Ultra Clean also repurchased $2.2 million of the Company's common stock as part of the share buyback program which was suspended in mid-October due to the uncertain economic environment.

Other key actions taken to buffer our cash position include our recently filed accelerated 2008 US Federal tax return, which will result in a $6.5 million refund that we expect to receive in early April of this year. I'm also pleased that we have extended our revolver loan agreement for three years, and added a three-year term loan for an additional $3 million. I'm confident that the actions I have outlined will provide us with the liquidity necessary to operate effectively during these challenging times.

I'll now provide an update on our three key strategic initiatives; increasing the non-gas delivery portion of our business, increasing revenue in our Shanghai facilities, and expanding our revenue base outside of the semiconductor capital equipment industry. Regarding our initiative to diversify our revenue base, total non-semiconductor revenues increased by 5% or $800,000 to $19 million during the quarter. A $2.4 million sequential increase in solar revenues offset decreases in flat-panel display and medical devices of $600,000 and $1 million respectively.

In total, non-semiconductor revenues increased from 30% of sales in Q3 to 40% of sales in Q4. We are projecting that non-semi revenues will continue to grow as a percentage of total revenue for the full fiscal year of 2009. From an annual perspective, medical device revenues increased 50% year-over-year to $28 million in 2008 on the strength of our expanding partnership with Intuitive Surgical. We have recently added new products, including a flusher cart and next-generation patient side robots which will allow us to increase our revenue in this market during 2009, despite negative economic conditions.

In the flat-panel display market, revenues nearly tripled year-over-year in 2008 to $30 million, as we benefited from our partnership with the AKT Division of Applied Materials, and added Photon Dynamics as a new customer. The flat-panel display industry is projected to contract significantly in 2009, and our revenues in this market will decline, though at a lower rate than the industry average, as we continue to gain new opportunities with Photon Dynamics and their new owner [Orbit Tech]. During 2008, we grew our solar activity from 0 to $5 million, providing gas delivery and gas abatement systems to our primary customers. Demand for these modules has stalled awaiting resolution of credit availability issues, but we expect rapid growth in this market once financing becomes more readily available.

Finally, on January 21st, we announced our global supplier agreement with FEI Company. Under the terms of this agreement, Ultra Clean will provide hosted manufacturing services to FEI in their Hillsboro, Oregon facility. FEI is a leader in the nano technology imaging industry.

It is also anticipated that Ultra Clean's Shanghai operations will be utilized to produce some FEI sub-assemblies. The transfer of current product lines to UCT is on schedule for completion during Q1 of 2009. As I have indicated previously, we expect revenues from our agreement with them to be between $10 million $15 million in 2009, and between $20 million and $30 million in 2010 with further upside potential as FEI grows its revenues and expands its outsourcing opportunities. We're extremely proud of the growth that UCT has achieved in its non-semiconductor business during 2008 and we expect continued success in 2009.

Regarding our initiative to expand our manufacturing in China, in the fourth quarter, we increased the percentage of revenue from our China operations to 26% of total revenue, including ramping our solar gas abatement systems to volume production. Being able to smoothly initiate production in Shanghai and smoothly transition production between the US and Asia is critical to our customers' supply chain strategies. And finally, we remain focused on expanding further into process modules and other non-gas delivery subsystems for our key customers.

During periods of low demand, such as the one we're currently experiencing, our customers have more opportunity to focus on their strategic objective of outsourcing higher-level assemblies. Several of our customers have initiated discussions with UCT on specific additional outsourcing opportunities. As in previous downturns, we expect to emerge from this one as a leaner more efficient company with additional business awards.

Looking ahead to next quarter, we project a further significant decline in industry-wide demand. We expect revenue for the first quarter of 2009 to range between $20 million and $28 million, and net loss per share to range between $0.25 and $0.36 on a GAAP basis. This loss per share estimate includes an expected $0.02 per share charge related to FFAS 123R.

To recap the fourth quarter activity, UCT achieved its original low-end revenue guidance, but missed the low end of its original earnings per share guidance in another very challenging quarter for the industry. We increased our non-semiconductor revenues by 5% sequentially to 40% of total sales. We increased our China-based revenue to 26% of total sales and announced a new partnership agreement with FEI Company. We extended our loan agreements for three years, and filed an accelerated tax return to recover $6.5 million from the IRS in April of this year. Though industry demand is very low, our pipeline of new products and customers remains strong. We continue to consolidate and streamline our US-based activities, and transfer more manufacturing to Asia.

In closing, we remain very optimistic about our market position, our flexible business model, our financial stability and our continued ability to outperform the industry. With that, operator, we would now like to open the call for questions.

(Operator Instructions). Our first question comes from the line of Edwin Mok with Needham & Company. Your line is open.

Thanks for taking my question. Let me start with just a quick housekeeping, Jack. You talked about tax rate at 35%. I imagine with this guidance, you expect losses for the -- at least for the next two quarter. Are you talking about 35% tax benefit in the coming year?

Yes, 35% tax benefit. Yes.

And does that exclude the cash you are going to collect back from the tax refund, I imagine, right?

Yes, that's purely a GAAP tax number. Effective tax rate, you are right. There will be losses in the upcoming quarter as we've guided to, and we're expecting a tax benefit on those losses.

Great. I just wanted to clarify that. And then one question I have since -- I have you, Jack. In terms of your property planning equipment, it dropped quite a bit. Is it because of the site restructuring? Is that why it dropped from like $20 million for the December quarter to just $9 million in the past quarter?

Edwin, that's a good question. The impairment that we're speaking about is not just impairment of intangible assets, but in fact we're [impairing] long-lived assets which include both the goodwill of about $34 million, some level of intangible reductions and also a level of fixed asset reductions in asset grouping. What you see there is the impact of the impairment.

Great. Thanks for the clarification there. Clarence, maybe on the business side a little bit. If we focus in non-semi, you mentioned how Intuitive actually declined $1million in last quarter. I'm just curious, have you start shipping the flusher cart assembly in the last quarter? And I thought that you -- there's like 20% increase in terms of dollar per system that you will be shipping to Intuitive. Can I ask why the decline $1 million -- ?

Sure. It's pretty simple. You are right, we didn't ship the flusher carts in the fourth quarter. We expect to start flusher cart shipments -- they had a design issue that wasn't fully rectified in the fourth quarter so the plan for initial shipments was delayed until the first quarter. We are now starting to ship those in volume. And we expect reasonable shipments in volume in the first quarter. Although, they have seen a little bit of a slowdown, nothing compared to what we have seen in the rest of the industry.

It is fair to say that you believe with the higher dollar per system that you might get improvement in that business in the first quarter?

A slight increase -- yes, we expect a slight increase in revenue and intuitive surgical in the first quarter, and also for the full year.

Great. And then on the FEI project, $10 million to $15 million looks like -- is great piece of business that you won. Can you provide a little more detail there? I understand you guys are basically going to take over some of the manufacturing in US here. Maybe talk about what does that entail -- what end market are those products [selling] into? And also when will you start to see actually [long] shipment? Is it the first quarter or more like sometime in the first half?

Sure. Okay. As you are aware some of their major projects are -- products are scanning and electron microscopes, and transmission electron microscopes. We will be doing all of the manufacturing in their northern California -- excuse me, in their North American operations for them with the exception of the ion beam guns which they consider proprietary. They will provide us the ion beam guns as a subassembly. We will take them in to a complete turnkey tool, fully tested that we will turn over to them.

In terms of volume or revenue -- when we anticipate to start to see revenue, there will be a very small amount of revenue Q1. But the system shipments are actually going to start in the latter part of Q2, and ramping to reasonable volume in -- and pretty significant volume in Q3 and Q4. If you can see, we're talking about $10 million to $15 million for the year. Their current run rate on these tools is about $5 million to $6 million a quarter or in that range. They are seeing very stable demands. They are one of our two customers that seem to have stable or even increasing demand.

Just a clarification, the $5 million to $6 million is once you ramp up to a certain level --

That's correct.

-- ongoing is that correct?

That's correct. Once we get to Q3 and Q4.

Great. And then one last question, and I'm jump up off queue. On the $20 million to $28 million guidance, can I get some clarification of what margins are you guys assuming on that to come to that earnings range? Second thing is it looks like semi equipment is still declining quite a bit. Do you think that in the coming year -- does that guidance bake in the assumption that semi will be less than half in the coming quarter or how do we look at that? Thanks.

The midpoint of the range -- the margin we are expecting is minus 9% on those very, very low volumes. That's just some of the fixed costs which we cannot absorb on such low volumes. In terms of the product mix, we expect the non-semi to continue to grow as a percentage of the total. We really haven't guided specifically how much that will be, but it will be in -- let's say several percentage points north of the 40% we ran in Q4.

Edwin, this is Clarence. Just to follow up to that; you implied that we're seeing a pretty significant drop in semi, greater than 50%. Yes, that is true from last quarter to this quarter, we're seeing a very significant drop-off all from our customers. We haven't lost any market share. This is just simply a function of end-user demand.

To some extent, some of our customers are having us rework some of the systems they have in inventory. We do get higher margins on the stuff where we do rework, but the total revenue is lower. And so the -- at least for this quarter, we think our customers are going to burn up the rest of their inventory and hopefully start to get back to some at least slightly better semiconductor demand. Some of our customers have projected revenue for the year to decline between 35% and 50%. Frankly right now, that would look real good.

Great. Thanks for the color.

Sure. You are welcome.

Our next question comes from in Jenny Yung from JPMorgan. Your line is open.

Hi, Jenny.

Hi. Good afternoon. Great execution. How much revenue in this quarter -- or in the fourth quarter came from gas panel versus non-gas sub systems?

Yes. We had -- the split of non-gas versus gas is basically 47% non-gas, 53% gas.

Okay.

Excuse me -- I have that reversed. 53% non-gas, 47% gas.

Okay. Got you. And just on your cash flows, despite the downturn, do you think you can still cut costs further to remain cash flow positive throughout 2009? If not, what quarterly cash burn rate are you comfortable with?

Yes. As we indicated, we expect to decrease our cash breakeven, so to be neutral from an operating standpoint on cash at $35 million in revenue per quarter. From an operating standpoint, we expect a loss of cash in Q1 which we think will be more that fully offset by the $6.5 million we expect to bring in as a part of our tax refund.

We also, Jenny, just so you know, would expect -- one of the things that historically happens in our industry is in good times, you tend to build up an inventory because your customers are demanding more product from you. As a consequence, your inventory builds up. We still have $40 million worth of inventory. We -- in lean times, what happens is we gradually burn down that inventory and turn that in to cash. I would expect over the next year to turn at least $10 million of that inventory that we have into cash which would offset any -- my expectation is that would offset any -- for any reductions we have for the year.

And Jenny, let me remind you of the non-cash charges we have inherent in our P&O which is currently about $2.4 million. You've got to keep that in mind when you are translating from a GAAP-based loss to a cash-based loss.

And assuming this continues to be a tough year for all of 2009, which seems highly likely, then we would get another fairly significant tax refund in the first quarter of 2010.

For 2009, you will have $10 million from your inventories to work down and an additional $6 million in tax refunds -- at least that much.

That's roughly our expectation.

Okay. Good. Then just for 2009, can you remind me -- like how much total in revenue will come from your new mandates and just what the big pieces are? There's FEI, Intuitive Surgical. Is there any others we haven't discussed yet that maybe were tossed around on previous calls?

Those are the ones that are generating cash -- revenue right now. There are several others that we won that are associated almost exclusively with the semiconductor industry, and also with the solar industry. But unfortunately, virtually all of those, even though we're shipping some of them, the revenues associated with them right now is extremely low. The ones -- as you said with the solar -- excuse me, with the medical and FEI are actually -- those customers are still actually shipping at the same levels or actually even growing a little bit.

Okay. What about the Photon Dynamics?

Oh, yes, that one is growing also. But, again, their aspect -- the flat-panel portion of the market is slowing down dramatically. But we are also -- we have been selected on a couple of new products that we previously mentioned there and we are shipping those.

Will any of these guys be greater than 10% customers do you think?

Obviously, Intuitive Surgical is a greater than a 10% customer. FEI at our current projected rate will be right around a 10% customer.

Yes, by the time we hit fourth quarter, they will be easily in that range -- in that 10% customer list.

Got you. Okay. Thank you.

You are welcome.

(Operator Instructions). Our next question comes from John Nelson with the State of Wisconsin -- Wisconsin Investment Board. Your line is open.

Hi.

Hi, John. Good to talk to you.

Hey, good to talk to you too. Can you share with us anything significant going on with your competition in the semi-cap equipment spaces that you compete in?

The only think that I think -- I certainly wouldn't want to talk name-by-name. But what our customers have told us is that they have a list -- several of our major customers have lists of suppliers that they consider to be at risk. We have been specifically told by all of our customers that we are not on that at-risk supplier list.

Okay.

And we have been lead to believe that some of our competitors might be which we believe will ultimately lead to our capturing some additional market share.

Okay. Good. And the other thing is I wonder if you could just give us your opinions on what signs that you'll be looking for in the semi cap equipment industry that may signal a bottom?

The biggest thing that is going to be a bottom to me is when my customers stop consuming -- I think we'll hit bottom when my customers run out of inventory. They don't have huge amounts of our inventory because everything we build is customized. But when they get cancellations at the last minute, two or three weeks before they are scheduled to ship their tool is when we ship our sub system to them. If they get cancellations inside that two or three week window, then they have a sub system that they have no customer for. And right now, they are still sending those back to us and we are reworking them into other usable sub systems for them. We charge them for that and we make a pretty good margin on that. But the fact that we're still receiving some of those indicates to me that my customers are still getting cancellations. Once they stop getting cancellations is when we'll start to see things level out and eventually go back up.

Okay. Thanks very much.

You are welcome, John.

And our next question comes from the line of Adam Mizel from Aquifer. Your line is open.

Hi, guys. How are you?

Hi, Adam. How are you?

Good. Thanks. Couple of quick questions. What is the bottom level of semi-cap equipment revenue that you can imagine in a [trauf] here? I would keep moving down, but as you said we're at new technology and maintenance. Is that what we're looking at in Q1 in your guidance? Or is that a bottom or is there more to go in terms of ringing out whatever is happening in the industry?

There can't be too much more to go. If you think of it -- we're talking about, say, mid-range $24 million. Of that, you can assume roughly 40% is outside the gas semiconductor capital equipment industry. 60% of $25 million is $15 million. That doesn't leave much further down to go.

At the peak, we were doing roughly $100 million a quarter in the semiconductor capital equipment industry. We're now down to 15% of the peak levels in semiconductor capital equipment. Virtually all of the stuff that we're getting now is non -- not for capacity buys. Virtually all of the orders we're getting, as I mentioned, are either new technology buys or spares -- support. We have got to be close to the bottom.

And do you have a sense of how long that can stay at that level, in terms of equipment wearing out, people needing to make changes? Is this -- can it stay there for a quarter, for a year, for two. What is realistic, given these plants are still running and producing?

This is Clarence again. Obviously, we're in unprecedented territory, right?

Yes.

Nobody has ever seen anything this bad. Several of our customers aren't even making projections. But the ones that are making projections, the worst I have heard is 50% down year-over-year. Frankly, we're down far more than 50%.

We did-- just for ballpark numbers, we did $266 million in revenue last year. If you just -- excluding the Intuitive Surgical or whatever, you just take half of that would be $135 million. Add on the FEI, it would be another $15 million. We should be closer to $140 million, $150 million which would be at least $35 million a quarter at which case -- that's our -- that's why we're targeting breakeven at $35 million a quarter. That's where we think is the low end other than an abnormal dip.

At that $35 million a quarter level, what type of gross margin can you run at?

We're still in the low range at 35, Adam. We're in the 5% gross margin range, once we ring out the cost. But that being said, we have our OpEx down. And you take out the $2.4 million or so of non-cash charges, we're basically even from the standpoint of cash on a pre-tax basis. That's not incorporated any tax benefit.

Right.

Frankly, right now, that's what we're focused on, Adam. Given the nature of the industry, everything is about cash right now. We want to make sure that we're at cash neutral at worst case; cash positive ideally.

Yes. And the good news of getting done here, I presume is when there is a turnaround, our margins -- how quickly do they expand on the upside?

Good point, Adam. Once we get this lean and certainly getting down to a position where we can breakeven at $35 million, the incremental revenue on the upside falls through at very high levels. In the mid-to high 20s is where we expect that revenue to fall through at into operating profits.

Yes. Maybe last question. Clarence are there -- as you have conversations about new mandates, are there in the pipeline more of the Intuitives and FEIs of the world? Or are you really building backlog of semiconductor guys who eventually will produce a lot of revenue? And we're hoping for the same cycle. And how do you balance that and where do you see things coming over the next few quarters?

I wish I could say there is another FEI in the pipeline. We would love to have that happen. We have been working on FEI for seven or eight months so that isn't a quick turn. It was a very fortunate one for us, in that the person running operations at FEI had previous experience with UCT when he was at AMap.

In terms of the new opportunities, most -- many of them are any the solar area. But again, right now, that is pretty much dead because people didn't get funding. Once that turns around, I think we'll see new companies that we're talking about and then a lot of the rest of the stuff is new opportunities -- additional opportunities with existing customers as they outsource more activity. For example, Applied Materials is in the process of significantly transitioning to Singapore. And as they do so, they are looking to outsource more larger modules and we would anticipate to be a beneficiary of this in the forthcoming year.

All right. Thanks, guys.

Thank you very much, Adam.

(Operator Instructions). Our next question is a follow-up question from Edwin Mok from Needham & Company. Your line is open.

Hey, Clarence, just a quick question on -- in terms of -- you mentioned the solar opportunity, and a two-part question. First is obviously you guys had strong relationship with Applied and it looks like your solar actually grew quite a bit in December quarter. Am I correct there? The number I have is $3.7 million. Maybe that is -- let me know if that's correct. Then the second thing is how do you view that business going through the first half of '09? You talked about slowdown in terms of contract there. Have you guys start to see that and do you expect that business to grow in 2009?

Lots of questions there Edwin. First of all, in the 2008 number, Jack has got that number.

The fourth quarter number you calculated is correct, Edwin. $3.7 million in the fourth quarter.

What happened there is we benefited from a significant increase in the gas abatement revenue that we started to receive. The down side on that is -- it is almost completely dried up in Q1 of '09, but we would expect that to become a significant number once those solar opportunities, again, move forward. Does that answer all of your questions?

Yes. Can I ask you how much of that was gas abatement, roughly in terms of -- was it 50/50?

No.

No. A very high percentage was gas abatement. 90% was gas abatement.

But that won't be our normal mix. That just happened to be the mix in that quarter.

Right. And maybe that's a better question actually. In terms of normal mix, how much do you expect -- what is the mix of gas abatement versus -- ?

The best way to talk about this is to look at it in an actual sub-fab line. On a sub-fab line, you have 28 process modules. On each process module, you have a gas delivery system and a gas abatement system. And the gas abatement system is slightly more expensive than the gas delivery system, but not much. It's pretty close to a 50/50, a little bit leaning towards the gas abatement. And we think there is a lot additional opportunities for us to pick up more work on each of these solar process modules.

Great. That's all I have. Thanks.

You are welcome, Edwin.

(Operator Instructions). We have no more questions in queue.

Thanks, Christy. Thanks everyone for joining the call. We look forward to seeing you at the next opportunity. Have a great afternoon.

Thank you. Have a great afternoon as well. This concludes our conference call for today. You may now disconnect your line.