Ultra Clean Holdings Inc (UCTT) 2009 Q4 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 Ultra Clean Technology 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. Casey Eichler, Chief Financial Officer, and Mr. Clarence Granger, Chairman and Chief Executive Officer.

I will now turn the call over to Mr. Eichler. Sir, you may begin your conference.

Thank you, Sarah. Welcome to our fourth quarter and fiscal year 2009 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 fourth quarter and fiscal year, and Clarence will follow with some remarks about the business.

A few moments ago, we issued a press release reporting financial results for the fourth quarter and fiscal year 2009 ended January 1st, 2010. 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 www.uct.com. Together with our recently-issued press release, this conference call enables the Company to comply with the SEC regulations for fair disclosure. Therefore, investors should accept the contents of this call as the Company's official guidance for the first quarter of fiscal 2010. Investors should not that only the CEO and CFO are authorized to provide Company guidance. If at any time after this call we communicate any material changes in guidance, it is our intent that such updates will be done officially via a public form such as 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 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. 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 and fiscal year 2009 results. Revenue for the fourth quarter was $72.8 million, or a 76% increase from the prior quarter, and an increase of 55% when compared to the same period a year ago. Revenue has grown from $23.3 million in the second quarter to $72.8 million in the fourth quarter, an increase of 212%. For fiscal year 2009 revenue was $159.8 million, compared to $266.9 million in fiscal year 2008, a decrease of 40%. Semiconductor revenue for the fourth quarter was $51.5 million, an increase of 91%, and non-semiconductor revenue was $21.3 million, an increase of 48%. Gross margin for the fourth quarter was 11.6%, s significant increase when compared to 7.9% in the third quarter, and 0.9% in the same period a year ago.

As the industry begins to recover from one of the worst downturns in semiconductor history, the industry is being challenged with rebuilding the supply chain and inventories, as well as hiring and training the work force in order to respond to the current ramp. We continue to address these challenges, as we stay focused on building our gross margin and strengthening our operations. Operating expenses were $6.3 million, an increase of approximately $1.3 million from the prior quarter. As we discussed last quarter in our earnings call, we returned our employees to full salaries and required no mandatory time off during the quarter.

Our operating income was $2.1 million or $0.09 per share, before interest expense and income taxes, compared to an operating loss of $1.8 million or $0.08 per share in the third quarter. A tax benefit of $542,000 or $0.02 was recorded in the fourth quarter. Fourth quarter net income was $2.5 million or $0.11 per share; this compares to a net loss of $1.4 million or $0.07 per share in the third quarter. The share count increased 1.2 million shares, as we moved to profitability and used fully diluted shares. Noncash charges for the fourth quarter were $572,000 related to FAS 123R, and $498,000 related to depreciation and amortization. Net loss for fiscal year 2009 was $20 million or $0.93 per share, compared to net loss of $52.4 million or $2.43 per share for fiscal 2008.

Turning to the balance sheet. Cash, net of third-party debt, decreased $3.5 million during the period. Accounts receivable was $34.8 million, an increase of $19.3 million, and day sales outstanding increased to 43 days from 34 days, as a result of increased revenue. Accounts payable of $46.1 million increased approximately $23 million, due to increased inventory purchases during the quarter to support fourth quarter revenue and first quarter demand. Days payable outstanding at the end of the fourth quarter increased to 64 days from 55 days at the end of the third quarter. Net inventory was $47 million, an increase of $10.4 million over the prior quarter. On a year-to-date basis, net inventory increased $7.2 million, from $39.8 million reported at the end of fiscal 2008.

I would like to shift to our guidance for the first quarter of 2010. In the first quarter, we are projecting continued revenue growth and increased income from operations. Our revenue guidance for the first quarter is $82 million to $87 million, with earnings per share in the range of $0.10 to $0.14. As was the case in Q4, the revenue growth will be primarily driven by recovering semiconductor capital equipment demand, with additional growth in all other areas that we serve as our markets. The tax rate for the first quarter is currently projected at 10%. A share count of 22.7 million should be used for the first quarter. As discussed on our last call, we projected receiving a tax refund of $3 million to $3.5 million. Due to changes in the tax laws, we anticipate a refund of $5 million in the first quarter.

Now Clarence will discuss our operating highlights for the fourth quarter. Clarence?

Thanks, Casey.

The fourth quarter of 2009 saw a continued increase in demand from semiconductor capital equipment customers, and customers in other emerging markets. As Casey stated earlier, UCT's semiconductor equipment revenue increased by 91% from Q3 to Q4. We also experienced a 48% increase in demand in all other served markets. As a result, Q4 of 2009 can be characterized as the quarter when UCT returned to profitability. Prior to this, we were last profitable in Q1 of 2008, almost two years ago.

As stated in our last earnings call, demand began to rebound in the Q3 of 2009, and is continuing to expand. As a result of this increased demand, we exceeded the revenue and EPS guidance we provided at the beginning of the fourth quarter. We anticipate further revenue growth in the first quarter, driven by increased demand in the semiconductor capital equipment market and our continued extension into other target markets.

Our balance sheet at the end of the fourth quarter reflects the impact of the revenue growth that we experienced during the quarter. In order to support the ramp in demand during the fourth quarter and projected into the first quarter of 2010, inventory increased by $10.4 million and our net cash decreased by $3.5 million dollars. Cost control measures continue to be a company-wide focus, as we progress into this industry upturn. In Q1, as Casey previously mentioned, we anticipate receiving a tax refund. We currently project this refund will be approximately $5 million, which will benefit our cash position moving forward.

I will now provide highlights on our activities and accomplishments. In addition to the significant recovery in the semiconductor capital equipment portion of our served markets, UCT continues to make major strides in expanding into adjacent markets. Earlier today, we issued a press release announcing the expansion of our business relationship with Orbotech. We are also targeting to enter a new market in 2010, the market for high-brightness LED's. During fourth quarter, we made prototype shipments into that market. Finally, during Q4 we began to experience a rebound in manufacturing at our Asian facilities.

I would like to further elaborate on each of these topics. UCT is continuing to perform very well at our stated objective of extending beyond the semiconductor capital equipment market. Earlier today, we announced our expanded business relationship with an existing customer, Orbotech. This will extend us into new products within the flat panel market. We will manufacture products from Orbotech's SuperVision range of high-speed automated optical inspection systems, for applications in the manufacture of flat panel displays. This production will take place at one of our two facilities in Shanghai. We anticipate that as a result of this, our revenue with Orbotech will increase from $3.3 million in 2009 to greater than $10 million in 2010, and over $20 million in 2011.

In addition to our expansion in the flat panel market, we also continue to make progress on expanding our business into the other complementary markets of research, medical and energy systems. Our hosted outsourcing project with the FEI Company is proceeding on plan, and we finished 2009 with revenues from them of greater than $10 million. For 2010, we are projecting to more than double revenues with FEI into the range of $20 million to $25 million. In the medical equipment market our major customer, Intuitive Surgical, continues to perform very well. In 2009, they were greater than a 10% customer for UCT, and they are projecting a 25% growth rate in 2010. We have a strong relationship with Intuitive Surgical, and continue to manufacture 100% of the robots used for their robotic surgical tools.

Also during the quarter, we saw our first revenue shipments for the solar market in almost a year. And as noted earlier, we are targeting a new market segment in the energy field for 2010, the high-brightness, or HB, LED market. The high-brightness LED market is a rapidly growing market that has been forecasted to triple in size by 2013. This represents a significant new opportunity for UCT, both for our chemical delivery and high-level assembly capabilities. Specifically, the gas delivery systems on these tools are much more complex than on traditional semiconductor capital equipment tools, with average selling prices approximately 2.5 times those of gas delivery systems on typical semiconductor tools. During the fourth quarter of 2009, we made prototype shipments of gas delivery systems for the HB LED market to one of our existing customers.

Finally, we are beginning to experience significant growth in our Asian manufacturing operations. During Q4, revenue from our Asian facilities was 20.3% of our total revenue, up from 16.1% in Q3. The integration of our new Singapore facility into UCT is well underway, and progressing on schedule. We expect this activity to be fully completed by the end of Q2 2010. We also anticipate continued significant increases in the percentage of revenue from our Asian facilities during 2010, with the transfer of US production to China and Singapore to support the activities of our key customers. The transfer of additional products from the US to Asia is critical to achieving our long-term financial goals.

In summary, during the fourth quarter of 2009, UCT returned to profitability for the first time since Q1 of 2008, and exceeded the high end of our revenue and earnings per share guidance in a period of a continued increase in industry demand. We continue to maintain our focus on cost-control measures; we are succeeding at expanding our position in new target markets and diversifying our product portfolio; we are growing our Asian operations, and increasing the percentage of our overall production manufactured there; we are projecting continued increases in revenue and operating income during Q1 of 2010; and finally, our pipeline of new products remains strong, and so does industry demand.

In closing, we are very pleased with our financial and operating performance, and we are extremely optimistic about the strength of our business model.

With that, Operator, we would now like to open the call for questions.

(Operator Instructions)

Your first question comes from the line of Jay Deahna. Jay, your line is open.

The line has been removed. And your next question comes from the line of Tim Summers.

Hi, guys, nice quarter.

Hi, Tim, thanks, thank you very much.

First of all, on the LED business you mentioned that was to an existing customer; was that to one of your largest customers?

It's to one of our larger customers, yes, that's correct.

Okay, good. Then secondly, your business is ramping -- has ramped fairly sharply for the last couple of quarters. Are you seeing any component supply constraints, particularly on -- for machined parts?

Tim, this is Clarence. We are seeing shortages on component parts, frankly, pretty much across the board. At first we started seeing shortages on machine and fabricated parts, particularly as we started ramping back up, and at this point we are starting to see some shortages on OEM parts. That has contributed to some inefficiencies during the quarter. But we are pretty confident by the end of the quarter or early in Q2 we will see that abate. It is starting to improve a little bit.

As you look at your guidance for the first quarter, has it been tempered a bit because of these component constraints?

We will probably have more orders than what we are going to be able to ship in Q1; so from that standpoint, yes that's correct.

Okay. Great, thanks.

You're welcome.

Your next question come from the line of Edwin Mok with Needham & Company.

Thanks for taking my questions. Congratulations for the good results. I was wondering, your non-semi revenue grew quite substantially in the last quarter. I was wondering, all of the different pieces, solar, flat panel displays, also medical as far as instrumentation, which area did you see the strongest growth in the last quarter?

Hi, Edwin, this is Clarence, thanks for the question. First, the growth areas that we saw the most significant growth outside of the semiconductor was, first, flat panel. The next biggest growth for us was in the research field, which is primarily FEI. Third was in the medical area, and then the fourth was in the energy area, which would include solar, and now our new high-brightness LED growth.

Can I ask, that high-brightness LED, did you guys actually recognize revenue from that, given that you guys shipped the prototype already?

I couldn't quite hear what you said. Could you repeat that?

I apologize for that. Did you recognize revenue for that high-brightness LED shipment?

Yes, we did.

Okay, great. Thanks.

They are prototype units for our customer, but they are revenue units for UCT.

Yes, of course; thanks for clarifying that. Then on -- you mentioned that the flat panel, you see a bit of shrink. Based on what your customer is telling you, do you expect that to extend in your first half of 2010 or was that more of a one-quarter type event?

Again, Edwin, this is Clarence. So we issued a press release today earlier where we were talking about extending our relationship with Orbotech; Orbotech -- our revenue from Orbotech has initially come exclusively from Photon Dynamics, which was then acquired by Orbotech, and for a while we have been only manufacturing the former PDI products, which are almost -- that are exclusively in the flat panel market. We have now been awarded more business from Orbotech, again within the flat panel market.

So we think our flat panel display growth is partially because of industry growth, but even more significantly because of picking up new business opportunities and new market segments, and new market share.

I see. Great. That was helpful. Sounds like some new penetration there.

Then I believe last quarter, Clarence, you talked about the business that you won in the semi area, that you have a strong pipeline that you expect you should be able to generate like $18 million-plus per year of incremental revenue. Do you have any update of that based on what customers have been telling you on the semi side?

Of course, everybody is, you know, trying to figure out how quickly the semi market is going to grow, and how long it's going to continue to grow. That's certainly difficult for us to project. But our overall projection on our semiconductor equipment revenue is that some period during this ramp, we will achieve $100 million in quarterly revenue in -- on the semiconductor capital equipment side. So in our last peak, in Q1 of 2007, we did $110 million in revenue, of which roughly 90% was on the semiconductor capital equipment side, so roughly $100 million in that quarter on semiconductor capital equipment.

There has been some speculation that the capital intensity on the semiconductor equipment side won't be as significant during this current ramp. We believe that, whatever that decline in overall semiconductor equipment spending is, will be offset by the new business that we've won over the last two years. So our expectation is that some point during this cycle, as we move to a new peak, we would expect to be able to do about two-thirds of our revenue in semiconductor and one-third in other business segments that we're serving, and we would expect the semiconductor portion to be $100 million in the quarter, and $50 million in the adjacent markets we are serving. So we would expect to peak at some point around $150 million a quarter, in the current cycle that we are experiencing.

Thanks, that was very helpful. You caught my next question already there.

So I'm going to ask Casey a question. Regarding the inventory level, I was wondering -- you know, (inaudible) increased this quarter, and I also saw receivable and payable expanded quite a bit this quarter as well. Do you have roughly what inventory level -- either in inventory days, as well as DSO and DPO, that you feel comfortable running your businesses, as you approach this $100 million-plus per quarter revenue run rate?

Yes, I mean going forward, I would like to see us flatten out at about this level from an inventory standpoint. Obviously, you talked -- or we talked a little bit earlier about some of the supply chain issues, and in some of the inventory issues with our suppliers, and so we had to grow -- when you grow 200%-plus in two quarters, we had to grow that more aggressively than we have had to in past ramps. But at this point, I think, over this quarter we should start to be able to flatten the inventory level around these levels, and shouldn't have to build inventory for the foreseeable future unless the ramp would steepen again -- continue to steepen again in the future.

So I think we've seen most of the inventory build at this point. You'll see our AP and our AR normalize a little bit, because we will be coming out of that huge, steep two-quarter ramp, and we'll kind of go back to little bit more what you are used to seeing.

That's all I have, thank you.

You're welcome.

Your next question comes from the line of Jay Deahna.

Hear me now?

Hi, Jay.

Hi. Okay, a couple of questions, Clarence and Casey. First one is, I'm trying to get a feel for your earnings power this cycle. So if you guys get back to that $110 million previous cycle peak level sometime this year, what would you expect your operating margin to be compared to 1Q 2007? And if you could remind me what your earnings were in that quarter, would you expect them to be that level or higher this time?

Yes, I think we did about $110 million in revenue in that first quarter of 2007, and I believe we did $0.24, and the share count was a little less than it is now, but that's where we were at that time. Going forward, obviously we're guiding for the current quarter, but I would think that we have, as we've talked about, more leverage in the model when we come back to those levels, and depending on how much more leverage is going to be both volume-related but also a balance between Asia and the US.

As you can see, we got back over 20% this quarter, and we think that will continue to build this year, though we think that's going to be a 2-year to 3-year story to really get to some of the potential that gets us to the model that we've talked about, which is from the 15% to 18% on a gross margin basis, and 8% to 10% on a bottom line basis. And so I think that you will see better leverage than we had at that $110 million in Q1 2007, but how much better is going to be a little bit dependent not only on the volume but also on the balance between Asia and domestic revenue.

Right, mix-dependent. Now, that $0.24 in 1Q 2007; was that fully taxed?

I believe that it was.

Okay, so you're saying that the next time around, if your share count is a tad higher and you are fully taxed, you still expect a little bit of leverage compared to that time; is that what you are saying?

Yes, absolutely, and we are continuing to build out things in Asia, which then allow you to have a different tax structure. That is not in place today, but we hope to be able to benefit from that in the future as well.

Okay. Fine.

Clarence, a question for you. You announced an expanded relationship with Orbotech, and you also announced that you're starting prototyping for LED tools; do you get mandates periodically from your existing customers that you don't formally announce?

Well, there are a lot of mandate that are in the $1 million to $3 million or $4 million range that we don't announce. I just don't think that's critical to announce on a quarterly basis. So sometimes -- you know, I do try to announce all the more significant ones, but a lot of the smaller ones we don't typically announce.

I see. In the last conference call, you had stated that your expectation for some sort of a peak revenue concept in the $150 million range was predicated on the existing and known mandates. Now you've just announced the new mandate, you've announced it with Orbotech; you've announced that you are starting to work in the LED space; you've indicated that you get mandates that aren't announced; are we in a situation where, if your sales pipeline continues the way it's going, that your concept of your peak cyclical revenue opportunity could change to the better over the next several quarters?

Yes. Everything you said is accurate, Jay. We did say that it was based on the existing mandates that we had, and these are new mandates. I am sticking with $150 million officially, but obviously there are additional opportunities out there, and we do think some of these markets could be pretty big opportunities for us.

Okay. If we look at your cut -- your customers, you have two customers, I believe, that service the etch market, Applied Materials and Lam Research; do you do business with both of those customers in etch?

Yes, we do.

Okay, because you talked about expectations for the capital spending ratio, also known as capital intensity, to be lower this cycle versus last cycle. I don't necessarily argue with that. That would suggest that the through-put of new models of semiconductor equipment increases at a greater rate than process steps; however, double patterning is coming, which is a significantly faster than historical increase in process steps, so that could be a variable. Also, with etch it looks like you are not seeing an increase in through-put on these machines, while you are seeing an explosion in process steps; it looks like etch may actually see an increase in capital intensity. I'm just wondering if you are exposed to etch?

Well first of all yes, Jay, we are significantly exposed to etch. We -- obviously, there are three major players, Tokyo Electron, Applied Materials and Lam, and we are exposed to two of the three major players there, and we have very strong market shares with both of the two that we support. And I do agree with you, the double patterning clearly is something that is enabling customers to move to lower geometries, move to the 30-nanometer range for line width, and it does look like that will require extra etch processing steps. I really don't know how much incremental processing time is associated with those additional double patterning steps, but clearly that will create some additional demand and additional opportunity for etch tools.

Okay, great. Two more questions. Second to last one is, I saw some research today that indicated that over the last week or so Samsung executives have been visiting your customers asking for pull-ins into 1Q from 2Q on a fairly significant number of machines; I'm wondering if that has filtered down to you, and if that's factored into your 1Q guidance?

Our 1Q guidance is factoring in all the information that we currently have. Our customers don't always share any specific pull-in requirements with us, but our earnings projection is factoring in all the information that we currently have. Our understanding is that clearly we are seeing some challenges that we mentioned earlier, with component shortages and fabricated part shortages; so clearly all of our customers, and I expect their end customers, are focusing on making sure that there aren't any shipment delays associated with the supply chain challenges that we are facing now. So we do see very good opportunities, now and going forward.

Then the last question is in terms of the cash, did you get it yet or are you expecting to get it? And is that going to -- are you going to accelerate the rate of debt reduction or just put it on your balance sheet?

For right now, we will put it on the balance sheet. It is not codified rule, but it's a rule of thumb that the payment would come to us at the end of this quarter. That's what happened last year, if you remember; we got it in the last week of the quarter, and that was in the cash balance. The US Government, it's not required, but it is their policy or their procedure that -- to pay that within that time frame. So we are hopeful that that will continue as it has. As you know, all the State and Federal Governments are a little more challenged maybe this year than they were last year, so we will see.

So we should receive that, but it's not received yet; it would be at the very end of this quarter. By the time we do our call, I will be able to give an update on (a) whether we've received it either before the end of the quarter or early in the beginning of the next quarter, or what the status update is there. Fortunately, unlike last year, where it was extremely important to get that timely, it's always important to have cash sooner versus later; we are not counting on it for our cash flow going forward, and we have a comfortable level of borrowing power, as well as cash, to move forward, whether it comes a week or two late or not.

Yes, actually you guys did a great job in managing your balancing your balance sheet over the last year, so congratulations on that.

Last question, do you see any enticing M&A opportunities for you being the acquirer that meet your 3-point acquisition criteria? And conversely, it's pretty clear that some of the big EMS companies are looking to kind of get into the lower-volume/higher-margin space; I'm wondering if you are getting any feelers from those people>

I wouldn't have any comment on feelers from anybody else, but relative to what we are strategically trying to do, we have done one significant acquisition in 2006; that worked extremely well for us. We did a smaller asset purchase at the end of 2008 -- excuse me at the end of 2009, and so we are of the belief that the market is beginning to recover. Our stock price is to a point where there is some value in our stock, and so we would consider an acquisition should a good opportunity come along. And I think this time in the market, where the industry is beginning to recover, some of the smaller players probably had a difficult time and might be considering an exit opportunity.

So while we haven't got any commitments or anything specific to discuss, this is certainly something that we would consider in the near term future. We are not, obviously, the kind of company that does lots of acquisitions, but we certainly would like to be opportunistic, and like to find ways to grow our revenue or expand our customer base, or expand our capabilities, as well as increase our profitability. So it is definitely something that we will consider in the future.

Great. That's it for me. Thanks a lot, guys.

(Operator Instructions)

Your next question comes from the line of Jagadish Iyer with Arete Research.

Hi, Clarence. Hi, Casey. Thanks for taking my questions. Two questions, please. Can you hear me?

Yes, hi.

Two questions, Clarence and Casey. The first question is, I just to understand, how much have you added in terms of your addressable market in the semiconductor space from 2007 to 2010, in this particular up-cycle, please?

Okay, well, in the semiconductor portion of our market, it's difficult to quantify exactly how much we've added. Historically, when we were supporting only the gas delivery market, we estimated the gas delivery market that we served to be about $1 billion market. And by extending into these larger process modules that typically the gas delivery systems go onto, the selling price for those is about three times the selling price of a traditional gas delivery system, and so we believe that our addressable market increased by roughly another $3 [million] to about $4 [million] in total.

So on the semiconductor side, with just the products that we previously had, we believe that our total addressable market was about $4 million -- $4 billion, and then obviously we've extended into all of these adjacent spaces.

Okay. And the second question is that, given the supply chain constraints that you are seeing right now, and if you really believe that there is a sustainable up-cycle, how should we think about the second half? How are your customers planning for the second half of 2010? Can you provide us with quantitative or qualitative, in terms of what visibility do you see for the second half of 2010, please? That's all I have, thank you.

Honestly, Jagadish, we really don't have much visibility into the second half of 2010, I mean clearly, at this point. We do have access to our customers' build schedules, because what we build is highly-configurable. And so, as a consequence, when we are making, for example, a gas delivery system for Novellus, if the end customer is Samsung that will have a different configuration than if the end customer is IBM; and therefore, we end up knowing who the end users are, and we have access to our customers' build schedules, and their manufacturing build schedules go out for about six months.

Beyond the six-month window into the second half of 2010, I really don't have any visibility on the semiconductor side other than what we are hearing anecdotally from our customers. Obviously, they are all optimistic at this point in time with regard to the second half, but we have no specific data to support that.

I would say though, that regardless of what growth rate we see in the semiconductor side, we remain very optimistic about the continued growth in these other markets that we are serving, that now represent about one-third of our total production output, and we think that that is going to continue to be very dramatic growth areas for us.

Okay. So one thing is on -- when you mentioned about your peak quarter or peak revenues for this up-cycle, should we think about it for the next say eight quarters or so? Is that the right way to think about it, please?

Typically, when we have seen up-cycles, they've typically lasted between 18 months to 3 years. So I would expect that we are in the early stages, obviously, of an up-cycle, based on what we seen historically. So I think it's not unreasonable to expect something -- expect us to achieve that peak level that we are talking about sometime in the next 18 months to 2 years.

That's good, thank you so much.

You're welcome.

Your next question comes from the line of Michael Needleman with Preservation Asset.

Good afternoon, gentlemen, how are you?

Good, thank you.

A couple of questions. Could you come back on what you talked a little bit about China, and forgive me because I came on a little late. Currently -- what's the production level that's you have over in China, currently? And if we kind of look out a year, where do think that production level is, as far as your total capacity is concerned?

This last quarter, 20% of our revenue came from our Asian manufacturing facilities; roughly, just under $15 million. We have three manufacturing facilities in Asia; two of them are in Shanghai, and the third is in Singapore. The ones in Shanghai, one of them is a 52,000-square foot facility, the other is roughly an 80,000-square foot facility, and the facility in Singapore is roughly 35,000 square feet. Utilization rates on those factories are all still relatively low, and we would expect to be able to produce probably close to $70 million to $80 million a quarter out of those facilities at some point in time, based on the size of the facility.

We expect -- what I've publicly said is that over the next two to three years, we would expect more than 50% of our revenue to be coming out of our Asian operations, and so we expect significant growth there in 2010 and beyond.

Just to kind of take that one step further, the overall goal that you have of 8% to 10% operating margins and 15% gross margins, I would assume that the Asian business is higher on both levels; is that correct? Could you maybe give a little bit more detail on that?

Yes, the Company traditionally has talked about the business trying to achieve 15% gross margins and 8% operating margins. What we've said is, in -- as we start to ramp in a cycle, if you can get a significant portion, which we've said is 50% or more of your business, over in Asia, that ought to take your opportunity up to the higher ends of the range, which would be the 18% on a gross margin basis, and 10% on the operating.

So there is a little better leverage over there than that, but obviously you have to take and pass some of that through to your customers. So we think that if you can get more than 50% of your revenue out of Asia, and ramp appropriately, you ought to get to the high end of that range -- of those ranges.

One last question. I think you said that you are still going to be somewhat capacity-constrained in Q1; is that correct? Did I hear you say that?

I think what Clarence was referencing was from a supply chain basis, not from a raw facility basis.

But that's what I -- so you're output, you are (inaudible), you are going to be capacity-constrained; is that a fair statement?

Yes.

Okay. Those orders then, or products that you are waiting on, if they could be delivered, are we speaking that those are going to be clearly in the second quarter, or are they going to be pushed out even further?

No, I think -- I know you joined late, I think Clarence reference the fact that he thought by the end of this quarter or the beginning of next quarter, most of those issues would have worked through. So I think by the end of Q2, you should be able to see that work through the system.

Thank you so much, gentlemen.

You bet.

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

Thanks for taking the follow-up. Just quickly on Singapore, you guys talked about the facility; how is that ramping? Are you guys generating revenue (inaudible). I understand part of that is to kind of (inaudible). Can you give us any update around that as well?

Sure, Edwin, this is Clarence. First of all, in terms of the Singapore facility, when we did acquire it there was some existing business there, mostly refurbished business, and that business is continuing, it's actually grown a little bit. That revenue in 2009 would have been -- for the entire year for that facility would have been about $4 million to $6 million. So we are experiencing a continuation of that revenue stream somewhere between a $500,000 and $1 million per month, and so we are enjoying that. But we are also in the process of upgrading the facility to meet some of our other customers' requirements, and we expect that facility update to be completed by the end of Q2., and to be beginning manufacturing for some of our other customers in that facility in late Q2 or early Q3.

And regarding that Applied [move], any update there?

I'm not sure what you meant. Applied is migrating their major manufacturing operations to Singapore; they are expecting to -- actually, they have begun some manufacturing in that facility, and so we are expecting to support their expectations out of our Singapore facility. When I talked about starting to ramp our operations in end of Q2 and beginning of Q3, it's primarily in support of Applied Materials.

Okay, that was helpful, that's what I wanted to try and get to. One last question on the high-brightness LED area, given that you're working with a supplier and doing a prototype for them, two things I guess. First is, do you think this experience of working with this supplier will help you to penetrate other new customers in the high-brightness LED market? And then, the flip side of that is, would you think that by working with this one supplier, you might be precluded from working with the other leading customer there?

Sure. I will answer the last one first. We don't think working with one customer precludes us from working with other customers. As -- one of the questions earlier was about customers we are serving in the etch market, and we are serving already multiple customers in the etch market, and the same happens in virtually every semiconductor, [CVD], et cetera, where we have multiple customers. So we have been able to convince customers and demonstrate that we typically have dedicated teams that we keep isolated, so we can protect a customer's IP; that has not been an issue.

So we do believe that the ability is there for us to work with multiple customers in that market. Again, we currently only have the one, but certainly we think that -- it is a target for us, and that's something we would like to achieve. We are the world's largest manufacturer of gas delivery systems; the gas delivery systems on these tools are very complex, and they happen to fit exactly in our sweet spot. So we think we have a lot to offer this market, and we are very excited about the opportunity.

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

You're welcome, Edwin.

(Operator Instructions)

Your next question comes from the line of Tim Summers with an [independent] investor.

A couple of quick follow-ups. Clarence your guidance for first quarter is $82 million to $87 million. Excluding the Orbotech business that you announced today, if you had made your guidance public two weeks ago, would it have been less than this?

Tim, not -- I'm the guy that starts to formulate the guidance and try to help Clarence, so maybe I'll take that one. I don't think our perspective has changed much in the last couple of weeks. Obviously, we've seen a very different market over the last couple of quarters, but right now we are pretty heads-down making sure that we can get the supply chain issues worked out, that we can deliver on time with the same quality. We've got a great quality record, and we're very focused on that, and we have been less sensitive to kind of the rumblings one way or the other. So I think within -- in a two-week window, we feel the same as we did two weeks ago, and we are just focused on delivering on time, with a very high level of quality.

Okay. Great.

This announcement is a culmination of a lot of work, so it didn't just happen on the spur of the moment; we have been working with Orbotech for a while now, and so this is a culmination of significant effort on the part of both companies, and so we've known about this probability for a while.

Okay. And just a quick follow-up on the -- sort of the structural nature of the Company. You guys have done a great job in managing your P&L and the balance sheet during this downturn; as you look at this next year, calendar 2010, do you anticipate changing the mix of full-time employees versus temporary employees, either here in the US or in Asia?

Yes, Tim, that's always a challenging question. It really depends on market conditions. We try to maintain about a 20% temporary work force in all our areas, all our served markets, and all our customers in all our regions. It really depends on the macroeconomic situation, as the country -- in a high-unemployment situation like this, we can maintain a 20% or greater temporary work force. As regions begin to move towards fuller employment, then it's more difficult to attract and retain temporary employees, and so we have to have more regular full-time employees. But I would say in the environment that we are in at this point in time, our strategic target would be to maintain about an overall 20% temporary employee work force.

Okay. What was the head count at the end of the quarter, Casey?

The total head count?

Yes.

It was 901.

901, okay, great. Okay, thanks, guys.

You bet.

You're welcome.

At this time, there are no further questions. Presenters, do you have any closing remarks?

I appreciate all of the interest and all of the questions. Certainly, we are going to work hard this quarter to try to execute to what we've talked about, and look forward to talking to a lot of you in the future. So thanks a lot, appreciate the interest.

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