Ultra Clean Holdings Inc (UCTT) 2009 Q3 法說會逐字稿

Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter earnings release 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). Thank you. I will now turn the call over to K.C. Eichler, Ultra Clean's Chief Financial Officer. Sir, you may begin your conference.

Thank you, Cara. Welcome to our third quarter financial results conference call. With me today is Clarence Granger, Ultra Clean's Chairman and Chief Executive Officer. I will begin by presenting the financial results for our third quarter, and Clarence will follow with some remarks about the business.

A few moments ago, we issued a press release reporting financial results for the third quarter ended October 2nd, 2009. The press release can be accessed from the Investor Relations section of Ultra Clean's website, along with the information for the tape delay and replay of the live webcast at uct.com. Together with our recently issued press release, this conference call enables the company to comply with the SEC regulations for fair disclosure. Therefore, investors should accept the contents of this call as the company's official guidance for the fourth quarter of fiscal 2009. 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 change in guidance, it is our intent that such updates will be done officially via public forum, such as a press release or publicly announced conference call.

The matters that we discuss today include forward-looking statements as defined in the US Private Securities Litigation Reform Act of 1995, related to matters including our future financial performance, new product orders, and shipments, and industry growth. Investors are cautioned that forward-looking statements involve risks and uncertainty 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. 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 let's turn to the third quarter results. Revenue for the third quarter 2009 was $41.3 million, up 78% from second quarter revenue of $23.3 million, and a decrease of 31% compared to revenue of $60.1 million in the same period a year ago. Semiconductor revenues increased 95%, or $13.4 million sequentially, while non semiconductor revenues increased 51% or $4.4 million sequentially to $13.7 million, reflecting increases in revenue for all other served markets. We experienced significant sequential improvement in gross margin in the third quarter, as gross margin of 7.9% compared to negative gross margin of 3.7% recorded in the second quarter, and positive gross margin of 9.1% in the same period a year ago. The $4 million sequential gross profit increase is primarily attributable to increased factory utilization.

Operating expenses were $5 million, a decrease of approximately $400,000 from the prior quarter as a result of cost savings activities. Our pretax loss was $2 million compared to a pretax loss of $6.5 million in the second quarter of 2009 and a pretax loss of $2.5 million in the same period a year ago. A tax benefit of $536,000 was reported in the third quarter. The third quarter net loss was $1.4 million. This compares to a net loss of $14.1 million in the second quarter 2009 and a net loss of $1.9 million in the same period a year ago. Our third quarter net loss per share of $0.07 compares to a net loss per share of $0.66 for the second quarter of 2009, and net loss per share of $0.09 for the same period a year ago. The second quarter net loss included a one-time noncash tax expense of $7 million as a result of a tax valuation allowance. The third quarter 2009 net loss per share is inclusive of noncash charges of $570,000 or $0.03 per share related to FAS 123R during the period, and $500,000 or $0.02 per share related to depreciation and amortization.

Turning to the balance sheet, during the third quarter, cash increased $500,000 to $30.7 million, while third-party debt decreased $500,000 to $15.6 million. Taken together, cash net of third-party debt increased $1 million during this period. This brings our net liquidity to its highest level since the first quarter of fiscal 2006. Accounts receivable of $15.5 million increased 50% from second quarter as a result of increased revenue. Days sales outstanding decreased to 34 days from 40 days at the end of the second quarter. Accounts payable of $23.1 million increased approximately $11.9 million or 106% sequentially due to increased purchases during the quarter, particularly in September, to support third and fourth quarter revenue. Days payable outstanding at the end of the third quarter increased to 55 days from 42 days at the end of the second quarter. Net inventory increased $4.5 million or 14% to $36.6 million to support fourth quarter demand. On a year-to-date basis, net inventory decreased $3.2 million from $39.8 million reported at the end of fiscal 2008.

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

Thanks, K.C. As stated by many of our customers, semiconductor capital equipment demand began to rebound in the third quarter of 2009. What surprised us was the magnitude of the demand increase. From Q2 to Q3, UCT's semiconductor equipment revenue increased by 95%. A small percentage was related to the completion of all of the rework in our customers' subsystems inventory, but most of it was due to increased demand. We also experienced a 51% increase in demand in all our other served markets. As a result of this increased demand, we significantly exceeded the revenue and EPS guidance we provided at the beginning of the quarter. We anticipate further significant revenue growth in the fourth quarter, again led by increased demand in the semiconductor capital equipment market.

Also during the third quarter, we continued to focus on our balance sheet, growing our net cash by $1 million. We accomplished this primarily through cost reduction activities. Our inventory increase of $4.5 million was primarily in support of additional shipments projected early in Q4. Additionally, we enhanced our strategic positioning in Asia through the lease of a manufacturing facility in Singapore and the purchase of facility related assets.

I will now provide further details on our activities and accomplishments. During our third quarter we continued our cost containment activities with nine shutdown days. In the fourth quarter, we are planning three shutdown days during the year-end holiday season. Also during Q3, we maintained across the board pay cuts ranging from 7% to 22%. These pay cuts were eliminated at the end of Q3, with all employees returning to full salary at the beginning of Q4. I want to take this opportunity to thank all of our employees for enduring the financial sacrifices that were imposed upon them the past two years. The return to normal pay levels is reflected in our Q4 financial guidance.

Strategically at the beginning of Q4, UCT made an addition to our Asian operation by leasing a manufacturing facility in Singapore and acquiring the related facility assets. The facility is a 35,000-square-foot manufacturing facility formerly operated by Allegro Manufacturing. In addition to the lease and the facility assets, UCT has acquired some existing systems integration business from Allegro. The integration business is primarily with two customers, one of whom is an existing UCT customer. The total 2010 revenue for this new business is estimated to be $4 million to $6 million.

Having a manufacturing presence in Singapore has become strategically important to UCT for two main reasons. First, one of our largest customers is establishing a major manufacturing center in Singapore, and it will be critical to have manufacturing support capability near them. Second, several current and potential customers are interested in manufacturing in Asia, but do not want their products manufactured in China due to IT concerns. We believe the addition of this facility in Singapore is an excellent complement to our existing facility in Shanghai. During Q3, revenue from our Shanghai facility was 16.1% of our total revenue, up from 14.9% in Q2. We anticipate significant increases in the percentage of revenue from our Asian facility during 2010.

Also during the quarter, we continued to make progress on expanding our business beyond the semiconductor capital equipment industry. Our hosted outsourcing project with the FEI Company is proceeding on plan, and we remain on track to have our 2009 revenues with them range between $10 million and $15 million. This will be the fastest ramp UCT has ever experienced with any new customer. Our pipeline of business opportunities with FEI and other customers remains very strong.

Now I would like to provide our guidance for next quarter. In the fourth quarter, we are projecting further revenue growth and a return to profitability. Our revenue guidance for the fourth quarter is $58 million to $63 million, with earnings per share in the range of $0.01 to $0.06. As was the case in Q3, the revenue growth will be primarily driven by recovering semiconductor capital equipment demand, with lesser growth in all of our other served markets. This will be our first quarter of profitability since Q1 2008.

In summary, during the quarter UCT exceeded the high end of its revenue and earnings per share guidance in a period of improving industry demand. We strengthened our balance sheet, increasing our cash and decreasing our debt. We maintained cost control measures, including mandatory time off and across the board pay cuts, and have improved our overall operating efficiency. We continued our successful transition into volume manufacturing for the FEI Company, and finally we added a new manufacturing facility in Singapore in support of our strategic objectives. Industry demand, though far below previous peaks, is demonstrating significant improvement, and our pipeline of new products remains strong.

In closing, we are very pleased with our financial stability and operating efficiency. We are more optimistic than ever about our market position and our business model. With that, operator, we would now like to open the call for questions.

(Operator Instructions). Your first question will come from the line of Edwin Mok with Needham & Company.

Hi Clarence, hi K.C. Congratulations for a very strong quarter. Really strong guidance.

Thank you, Edwin.

So first question I have is on the non semi group. It looks like it's actually (inaudible) $0.51 sequentially. Can you help me out with which area is showing strength over other areas that are weaker?

Sure, Edwin. This is Clarence. We saw a very strong rebound in the medical portion of our business. As I think I mentioned last quarter, we had actually seen a slowdown, a little bit of a slowdown in the medical side. We saw a significant recovery on that side. We're seeing good recovery in flat panel, and the research with FEI continues very strong. I would say the only weak area that we're experiencing is still on the solar side. We've seen very little -- it's coming up a little bit, which as a percentage is a very large number. But the magnitude of the overall revenue in solar is still very small for us. So that's the area that's hurting most. All the others seem to be making a good rebound.

Any of these nonsemi customers more than 10% of customers? If so, is it possible for you to guess how much?

My sense would be that there will be one customer that's nonsemi that will be more than 10%.

And can you tell us how much?

Oh, I would say that they are probably roughly 14% or 15%.

Great. And then if you look out into the fourth quarter, do you expect similar to where the nonsemi piece -- it's growing but maybe not as much as the midpoint of the guidance, or is your sense that piece is [outgrowing your guidance]? Is that fair to describe it that way?

Yes, that's fair, Edwin. We're continuing to see the greatest percentage growth in semiconductor. Obviously semiconductor went down further, and so it seems to be bouncing up a little more than the other areas.

Great. And then could you talk -- it seems like a lot of customers -- their comments could suggest they have better visibility in the of first half 2010. Does that visibility translate to you guys, or are you guys still pretty sure in terms of -- only for one quarter, or how do you look at that?

Well, we don't think it's appropriate to give guidance beyond one quarter. But we do have -- because what we build is highly customized for each of the end users. So if we're building a tool for Novellus, say, and the end customer is Samsung, we will know that -- or if the end customer is Intel or IBM, we'll know who the end customer is, because of the degree of uniqueness associated with our subsystems. So we typically get our customers' build schedules as far out as they go. In some cases they go out six months. Obviously within the three-month window, they're more accurate, but we typically get some level of visibility out beyond one quarter.

So fair to say that your visibility has improved, given that your customers' visibility has improved?

Couldn't quite get that, Edwin.

Sorry. So it's fair to say that your visibility for the business beyond the quarter has improved, given that your customers -- their is visibility improving, right, beyond just one quarter?

Yes, I would say that our views are consistent with what you're hearing from our customers.

Okay, great. And then I have a question about, if I go back a year or two years ago, you guys had announced a number of [end dates], obviously 2008, [tough year] for the semi equipment industry, and again this year. So I imagine a lot of the mandates -- shipping, anything, because your customers didn't stop ordering. Is it possible for you to provide a number or give some way of quantifying how much that pipeline could potentially turn into revenue? Any color around that?

Sure, Edwin. So I went back and looked at those numbers prior to that call, anticipating interest. Those added up, if you added up all those, it added up somewhere in the range of $80 million to $100 million in annualized revenue. And most of those projects have not gone away, as you pointed out -- that those in the slowdown, many of those projects either didn't come the full volume or certainly didn't grow at the rate our customers were expecting. But I would anticipate at some point that we have the potential with those new projects that we had mentioned roughly $80 million to $100 million in annualized revenue.

Is that $80 million to $100 million incremental to what you're doing, or are you shifting maybe $5 million to $10 million (inaudible).

It is so complicated. Some parts of it we are shipping. A lot of it aren't. If you look at this from an overall standpoint, what I tried to do is figure out where we likely to be at our next peak. So in 2007 was our peak year, we did $400 million in revenue, and in our peak quarter we did about $110 million. We did $110 million. At that time, roughly 90% of our revenue was coming from semiconductor, and 70% to 80% was coming from the gas delivery business. We're now to a point where about 67% is coming from semiconductor and 44% gas delivery.

And we've added new customers, FEI and Orbitech, that were not included in that $80 million to $100 million. And Intuitive Surgical is ramping beyond what we expected. So my thinking is that when we see a peak at the next earnings cycle or next revenue cycle, whatever, we're likely to be 1.5 times what we were at the last revenue peak, so instead of $400 million, I would expect us to be in the $600 million range with all the incremental business and business opportunities we've achieved.

Just two, I guess, more related to the model, housekeeping questions. Assuming that you remain profitable in 2010, how do I look at tax? And also in terms of your mix, as you mentioned on your call to us, temporary production that you guys have left, or also some shutdown days that your business will have potential down days. How do I look at OpEx in 2010?

First, on the taxes question, I would look at next quarter probably being around a benefit of around $200,000. So if you were going to model, I think I would model the $200,000. The reason we're showing the benefit is we've talked -- we've got a tax refund that's going to come in the first quarter, and you're able to take some benefit, even though we're fully reserving against taxes up until that level. So that's what's leveling out here. Next year, again, we're reserving -- we'll continue to reserve taxes, but you are going to have taxes at foreign entities, you're going to have withholding taxes, et cetera. And so I'll give better guidance once we get the tax provision done for the year and we have an understanding of what we're looking at next year, but we will have a small tax line that will come through next year. But it's really going to be related to the foreign entities and the withholding taxes and miscellaneous taxes that you incur, so it's not going to be at the 37% rate that we've used in the past. But I will give you a better sense of that next quarter as we get closer to where we think the tax situation is going to settle out.

Finally, on the OpEx?

I'm sorry, what was the OpEx question?

The question just, given that some of the expense is coming back, obviously this was a temporary measure. How do I look at your OpEx line going forward?

I mean, I think that we're going to have the same impact that you are going to have across the company related to the payroll. We're looking very closely at all of our -- even the payroll we've had reduced since [the return] Clarence talked about as well as the mandatory time off, I think you might see a slight increase in the OpEx related to volume, and to obviously the pay and the mandatory. But we're working very hard to continue to hit the targets that we talked about last quarter, and I don't see a big change to that.

Is it fair to say -- you used to have like $8 million to $9 million per quarter OpEx, when the revenue level was like $100 million plus level. Is it fair to say that your OpEx (inaudible) CapEx level, if you get back to that $100 million plus?

That is absolutely correct, Edwin. So one of the things we've done is modify our business structure. I mean, one of the things that -- you take a look at Q3 comparison. In Q3 of last year, we had $60 million in revenue, and we actually had a loss per share of $0.09. This year, Q4, if you take the midpoint of our guidance, it's roughly $60 million, and we're saying we'll have a profit of $0.02 to $0.03 on that.

At the midpoint?

At the midpoint. So you can see that there's been a structural change. And that's factoring people being back at full salaries and taking just a nominal number of shutdown days around the holiday season. So that is -- should be a steady state, ongoing operating expense level, reasonable operating expense level. So, yes, we've reduced it dramatically from where it was and I would expect to stay down. Obviously as we grow more to $100 million, it will increase somewhat, but it will still be significantly lower than it has been in the past.

The obvious places are around the pay cuts being returned and the mandatory time off. Obviously the more you sell, the more commissions you have, so there are impacts to the growth. What Clarence is saying, it was very, very difficult for the team here to get to those levels, and we're going look at that very hard as things start to ramp to see how we can do things more efficiently and more effectively versus just returning back to the operating structure that we had there before.

Great, that's all I have, thank you.

You're welcome, Edwin.

Your next question comes from the line of Jay Deahna with JMP Securities.

Thanks a lot. Following up on that last line of questioning, it's obvious that the leverage effect is a little muted here in 4Q because of the new manufacturing facility and bringing the compensation back from your shutdown days. As you move through 2010, if your revenues grow sequentially each quarter, would it be fair to assume that the operating leverage effect going positive would be a little more rapid than coming off of a lower than normal cost basis?

Sure, I think the leverage on the way up -- Clarence has talked, I think, quite a few times in conferences, et cetera, about -- we tend to recover a little more quickly when things start to ramp up than the broader semi cap equipment market. As you recover, ramping those expenses does delay a little bit on the way up. So you are going to see some leverage from the recovery, and especially as you're moving from $23 million to $41 million, into our guidance next quarter. You are going to see some increased leverage for a while in that model, and I think that's going to carry into 2010.

Okay. Then --

Let me add to that, Jay. This is Clarence. Obviously we do expect to see significant growth as we move forward in terms of the drop-through to the bottom line, and we think we've done pretty well on that in Q3, if you compare it to where we originally thought we were going to be. But I would make a comment. You mentioned returning salaries and reduced time off, and you also mentioned the new facility. The cost of the new facility is going to be very -- is not huge. It's pretty small cost, and we think the incremental business that we're picking up associated with this will more than offset the cost of that incremental facility. So that will not be a burden on our cost structure rolling forward.

Okay.

In fact, long term would be very helpful.

Okay. And can you refresh us on what your GAAP and non-GAAP break-even points are now and what are your upside cyclical gross and operating margin targets?

Well, if you look at our gas and non gas businesses, as Clarence talked about --

No, GAAP.

Oh, I'm sorry. On a cash basis -- we didn't talk to that because we really haven't changed our expectation. We have said mid-40s for our cash flow break-even, and mid-50s for our profitability. And I think as you can see in our guidance, we're holding to that, even though we have some of these expenses coming back. So we continue to feel that we can break even and get to profitability at the prior levels that we talked about last quarter.

And obviously break-even is mix dependent, so would you say semi equipment being a little bit on the higher end of normal as a percentage of the mix, is that good or bad for -- ?

Actually, it's pretty neutral, Jay. This is Clarence. We get pretty much the same margins over time with all of our customers in virtually all of our industries. It tends to gravitate to a level that seems to be pretty much consistent in terms of what customers are willing to pay for outsourcing services. Obviously we provide a little more than just the traditional contract manufacturer in that we do engineering activities and other similar kinds of things that bring a little more value add. But that seems to be consistent in terms of what our customers are willing to pay for that service.

What you do see, as we've talked about in the past, is as you get more mix going to Asia -- and that's China as well as the new facility we talked about in Singapore -- you do tend to get better margins as you get increasing concentration or revenue coming from those low-cost regions.

So as you increase your revenue from Asia this cycle versus last, do you still expect your normal or upside revenue run rate margins to be higher than last time? If you could just refresh my memory what those targets are.

I think when you get out into the cycle, depending on the mix that you are going to have, your gross margins are probably in the 15% to 18% range. And I think your bottom line is probably in the 8%, give or take range, depending on the mix that you have in Asia.

So one thing I would add to that, Jay, is I am more confident than ever that we're going to see a significant shift to Asia over the next two to three years. So up until now, we've been shipping in the range of 15% to 20% out of our Asian facility. I absolutely believe within the next two or three years more than 50% of our revenue will come out of our Asian facilities, which will have a net positive impact on our overall gross margin.

Okay. Now, what K.C. said, 15% to 18% gross margin objective range, I didn't quite catch what he said on [operate]. I thought he said a single point instead of range. Is that right or is that wrong?

I said approximately. We've talked in terms of 6% to 8%, and so depending on where we are in the cycle and where we are in the mix, that's probably a range.

I see. Okay. Go ahead.

We would hope to get closer to the 18% in Asia and the 15% in the US.

Okay.

On the gross margin side.

That's fine. Clarence, when you were talking about expectations for this cycle versus last cycle, and you ran through that math that came out with $600 million, which was 1.5 times bigger than your last peak -- was that predicated on business that you have today and design wins that you already have that have not yet ramped? And does that not include incremental design wins that may occur over the next year or two?

You're correct -- that does not include incremental design wins. That includes where we think we are, what percentage of our business is already expanded from gas delivery to other modules in the semiconductor, the additions with FEI, the additions with Orbitech. If we were to bring on some new customers, say in other areas, we still are hopeful that we'll see some growth out of the solar side. So as we're able to identify new customers and new product opportunities, that would be further potential for upside.

The last one for me is relating to that. You did say in your prepared comments that your sales pipeline was pretty good. So I presume that there's still incremental opportunities of existing customers and some other customers out there, so where do you stand with all that? Is there other Intuitives or Varians or FEIs or Photon Dynamics floating around out there? Characterize the sales pipeline and if any of that will transition to upside revenue in 2010 or 2011?

First of all, I wouldn't say there's any FEIs out there right now. There may be, but we don't see any on the immediate horizon. I would say there are lots of little opportunities. By little, I'm hoping things that could be $5 million or greater with several of our customers. Those would be incremental. I was frankly hoping to have some in this quarter. I think maybe some of that ended up being timing associated with our customers, or maybe the impact of the ramps, slowing their ability to transition products down. But I'm very comfortable in that 2010, we'll see quite a few new opportunities that will be incremental to our existing business.

Great. And actually, I did have one last one. I don't know that I've ever seen a company deliver positive cash flow with 78% sequential revenue growth. That was pretty impressive. What were the tricks of pulling that off? And going forward, given your expectations for growth sequentially over the next several quarters, do you expect to continue to be cash flow positive?

One of the things that we do, then I'll let K.C. add on, but we're a fairly quick-turn business. So we can typically -- time from receipt of orders until shipment to delivery can be typically in the four, maybe six weeks range. It's getting closer to four weeks. So we can typically turn things fairly quickly. So our customers give us an order. We have relationships with our suppliers where they can provide us product, raw materials, typically within two to three weeks. So we don't end up with large increases in inventory that are sitting on our shelves for extended period of time. So we have traditionally been able to generate cash both in good times and bad times. Obviously none of us has ever seen a bad a time as the early part of this year, but typically we've been able to generate cash in good times and bad times, and our expectation going forward into 2010 is that we will be a cash generator. K.C., did you have -- ?

No, I think that covers it pretty thoroughly. Obviously we had a build in AR and AP that you would expect in particular as I referenced towards the end of the quarter. We had quite a bit of AP that obviously the product may not still be here. Might have shipped, but we haven't paid down the AP yet. So there are ebbs and flows, but I think Linda and the team here have done a good job of cash management back through the real severe downturn. Now as we're going back up, we're not loosening up the focus on watching and monitoring and maintaining cash. So it's what kept the good companies alive through the downturn, and I think it's what builds companies in the upturn.

One last point on that. Just to let you know, we are expecting a tax refund in Q1 of 2010 that should be somewhere between $3 million and $3.5 million, so that will be incremental cash us.

Great, thank you very much.

You're welcome.

You bet.

(Operator Instructions). Your next question comes from the line of Tim Summers with Wunderlich Securities.

Nice numbers and guidance. Are you guys seeing your OEMs pull any business in from their first quarter build plans as they head to the back half of this year, specifically the fourth quarter?

Not that I'm aware of right now.

Are you seeing -- obviously you've seen a fairly steep ramp in 3Q and 4Q business. Are you seeing business in the first quarter or first half of next year ramp at increasing rates as well, or is that leveling out?

It's a little too far for us to project forward, Tim, but I would say it's definitely not decreasing in that time period. It's a little early for it to have filled out. It's hard for us to know how it's going to fill out, certainly not beyond Q1. But we're optimistic about Q1.

And secondly, you mentioned that you were going to be taking three shutdown days in 4Q. How many -- in a normalized business environment, how many do you normally take?

Yes, that's what I was going to point out that this is the return to normal situation. So for those who have looked at the calendar, I think Christmas this year is on a Friday, and New Year's is on a Wednesday or Thursday. So we're talking about taking off the three days between those two periods. And we'll still have people working that are working on critical projects. That's a normal mode of operation for us at this time of year.

Okay, great, thank you.

You're welcome.

Your next question is a follow-up from the line of Edwin Mok with Needham & Company.

Hi. Thanks for taking the follow-up. Question quick on FDIC. You mentioned you expect to hit the $10 million to $15 million target that you have per year. Do you have any idea -- and you talked about your results for the year. How do you look at that company or how did that business go in 2010? Do you expect that to -- obviously it's a very steep ramp. It's hard to target [occasional 2010]. can you help us out over there?

I don't know what I can do to help you out, Edwin, but this is Clarence again. I guess way you can think of it is we didn't start business with them until Q2. So the $10 million to $15 million that we're talking about is spread over three quarters instead of four. So you can assume that we'll do at least one quarter more than what we're talking about, an extra $4 million to $5 million, so you can assume $16 million to $20 million with the steady state that we already have. Last quarter, I mentioned that we had, I think it was an extra $4 million to $5 million per year with them in a new award that we've received, so you can assume $20 million to $25 million with the current business that we've already received from them. Obviously I haven't made any announcements with other new business, but we're certainly hopeful of getting new business with them.

Great, that was helpful. Then on Intuitive, I think you guys have announced you got one [extra] module -- can I ask, did that help you in this quarter? Did that margin finally start to ramp for you guys for this quarter? Can you help me out?

Sure, that extra module that we received from Intuitive Surgical is a cleaner module, so it actually cleans the surgical tools. It's an ultrasonic cleaner. The volume on that has not significantly ramped at this point in time, so that was not a factor in our increased revenue with them in this past quarter. We're still hopeful that they will gain significant market acceptance, but it has not yet happened. It's upside.

Great. Thanks for clarifying that. That's all I have. Thank you.

You're welcome.

(Operator Instructions). You have another follow-up from the line of Jay Deahna with JMP Securities.

Thanks very much. First of all, on Intuitive Surgical, where do you stand in their manufacturing pecking order? Are you their largest manufacturing partner or in the top three?

We make 100% of the robots for -- the patient side robot. So they have two major consoles. They have the doctor's side console that essentially is joystick controller and video displays, and they have the patient side console which is the robot. So I'm not sure what the revenue split is between the patient side console and the doctor's side console. We have 100% of the patient side console. So we are either number one or number two of their largest suppliers. We're real -- if we're not number one, we're very close to it.

I see. And are they telling you anything about the rate at which they're seeing their machines purchased for new types of surgeries that weren't done before?

They aren't talking about the rate. They told us that they were recently qualified for heart repair surgeries, which is a relatively new thing for them, and so -- but we have not been told what the rate of acceptance is.

Okay.

Obviously that's a key part of their objective, is to try and find greater application and to expand internationally.

Right. Okay. And then second topic, are you actively hiring new people in manufacturing today in all regions, and are you -- did you acquire people in Singapore?

It was a small number of people in Singapore, less than 20 people in total. So there was some add there, but it was a very small group. In the US, we ended last quarter at about 387, and we ended this quarter at around 454 people. And so we have been adding people both full-time and temporary as we've ramped our manufacturing. We've pulled -- I don't know if Clarence mentioned this, I don't think he did, but we've taken everybody back we had on furlough. So we don't have anyone left on furlough. That was obviously where we went first.

Are you hiring -- is your headcount going to be higher at the end of 4Q than it was at 3Q?

Yes.

Okay. So obviously that's setting up for something in 1Q. Okay, so then the last question is are you looking actively at any acquisitions right now, or conversely, is anyone looking at you? Because I know that some of the big US EMS companies are looking to do more business with smaller customers, and you're a pretty interesting niche EMS company. All of a sudden you might be in that wheelhouse. Just wondering if you're seeing any overtures from that perspective.

Obviously we're not going to make any comment about anybody or any overtures out there. On our front we've said last quarter and I think we would continue to say this quarter that we continue to look at growing the business, both organically and nonorganically. So we are always looking at ways to build the business in accretive way, and we'll continue to do that. But on people looking at us, I really can't make a comment.

And then the last question, Clarence, do you still have that same methodology in acquisitions? I think you had like a two or three point philosophy on that?

Sure, our philosophy is it needs to be immediately accretive. It needs to add to either our customers or capabilities, and it needs to be of reasonable size. So those are pretty much our criteria. We're very consistent with those. And we do think, as you know, we did an acquisition in the middle of 2006. That has been very successful for us. Financial times have been difficult. We are out of that situation. So we're in a better position should a good opportunity come along to be able to execute on that.

Great, thank you.

You're welcome.

And there are no further questions in the queue.

All right, well, I'd like to thank everybody for joining the call today. If there are follow-up questions, be happy to try to answer those in the future, and on behalf of Clarence and I, appreciate the interest. So thanks again.

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