Ultra Clean Holdings Inc (UCTT) 2010 Q1 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 conference call. After the remarks, there will be a question-and-answer session. (Operator Instructions) Joining us today is Mr. Casey -- Casey Eichler, Chief Financial Officer. I will turn the call over to Mr. Casey Eichler. Sir, you may begin your conference.

Thank you, Dawn. Welcome to our first 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 first 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 first quarter ended April 2, 2010. The press release can be accessed from the Investor Relations section of Ultra Clean's website, along with the information for the taped 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 the call as company's official guidance for second quarter of fiscal 2010.

Investors should note that only the CEO and CFO are authorized to provide company guidance. If, at any time, this call -- after this call, we communicate any material change in guidance, it is our intent that such updates will be done officially via public form such as a press release for 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 products, 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 events or circumstances that occur after this call.

Now here are the first quarter results. Revenue for the first quarter was $98.5 million, or increase of 35% from the prior quarter and an increase of 340% when compared to the same period a year ago. Semiconductor revenue for the first quarter was $78.3 million, an increase of 578% and non-semiconductor revenue was $22.2 million, an increase of 86% when compared to the same period a year ago. Gross margin for the first quarter was 12.6%, an increase when compared to the 11.6% in the fourth quarter and negative 12.8% in the same period a year ago. We are focusing on operational efficiency in our gross margins as business continues to ramp.

Operating expenses were $7.8 million, an increase of approximately $1.5 million from a prior quarter and $500,000 increase when compared to the same period a year ago. Our operating income was $4.6 million or $0.20 per share before interest expense income taxes and compared to an operating income of $2.1 million or $0.09 for the fourth quarter. Income tax expense of -- excuse me, $618,000 or $0.03 was recorded for the first quarter.

First quarter net income was $3.9 million or $0.17 per share. This compares to net income of $2.5 million or $0.11 per share for the fourth quarter. The fully diluted share count was $22.9 million, an increase of 300,000 shares from the prior quarter. Non-cash charges for the first quarter were $677,000 related to FAS 123R and $525,000 related to appreciation and amortization.

Turning to the balance sheet, cash increased by $1 million from the prior quarter. As previously discussed, UCT did receive a tax refund of approximately $5 million during the first quarter of 2010. Cash, net of third party debt, decreased $2.5 million during the period. Accounts receivable was $45.5 million, an increase of $10.7 million and day sales outstanding decreased to 42 days from 43 days. Accounts payable of $54.3 million increased approximately $8.2 million, due to increased inventory purchases during the quarter to support first quarter revenue and second quarter demand. Days payable outstanding at the end of the first quarter decreased to 57 days from 64 days at the end of the fourth quarter.

Net inventory was $56.7 million, an increase of $9.7 million over the prior quarter. Inventory levels are projected to stabilize during the second quarter. Now, Clarence will discuss our operating highlights for the first quarter. Clarence.

Thanks, Casey. The first quarter of 2010 saw a continued increase in demand from semiconductor capital equipment customers. UCT's overall revenue increased by 35% and our semiconductor equipment revenue increased by 52% from Q4 to Q1. In our last earnings call, I stated that demand began to rebound in the third quarter of 2009 and has continued to expand. As a result of this increased demand, we exceeded the revenue and EPS guidance we provided at the beginning of the first quarter. UCT has not been at these revenue and profit levels since Q3 of 2007.

We anticipate flat revenue in the second quarter driven by the near-term leveling out of semiconductor equipment demand. Our balance sheet at the end of the first quarter continues to reflect the impact of the revenue growth that we experienced during the quarter. In order to support the ramp in demand during the first quarter and projected revenues for the second quarter, inventory increased by $9.7 million and our net cash decreased by $2.5 million. We anticipate that in the second quarter of 2010, we will generate approximately $3 million to $5 million in cash as our inventory levels stabilize and operating profits continue to improve. In Q2 and for the balance of the year, a key focus for UCT will be improving operating efficiency and margins.

I will now provide highlights on our activities and accomplishments for the first quarter. During this third successful quarter of recovery, we continue to experience delays from some of our key suppliers. In order to meet our customer's demands, it was necessary to work extensive overtime. I am pleased that through the efforts of our manufacturing teams, we were able to meet all of our required shipment dates. However, this was achieved at the expense of operational efficiency.

Our goal for next quarter will be to fulfill all of our order demand while increasing our manufacturing efficiency. Also during the quarter, while our demands for semiconductor, medal and research equipment continued to grow, we saw some decline in demand from our flat panel customers. Our total non-semiconductor revenue for the quarter declined from $21.5 million to $20 million, with declines in flat panel demand offsetting growth in the medical and research segments. We believe we will see a return to growth in the non-semiconductor portion of our business in the second quarter. Our relationships with all of our non-semiconductor customers remain very strong.

Last quarter, I announced our expanded business relationship with Orbotech and the extension of UCT into new products associated with the flat panel market. I am pleased to announce that we shipped the first supervision automated inspection tool to Orbotech during Q1. I personally attended a ribbon cutting in Shanghai during March with senior Orbotech executives to celebrate this shipment. We continue to anticipate that UCT 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 a different market segment, we continued with prototype shipments into the high brightness LED market and we were very confident we will begin generating significant revenues from this market by Q4 of this year. Our Asian manufacturing operations are continuing to grow. During Q1, our revenue from our Asia facilities was the highest it has ever been at 21% of our total revenue, up from 20% in Q4.

I am excited to say that the integration of our new Singapore facility into UCT will be finalized during Q2 with the official opening of this facility occurring in May. As stated last quarter, we anticipate continued significant increases in 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 focus of transferring additional products from the US to Asia is a critical activity for achieving our long-term financial goal.

I'd now like to shift to our guidance for the second quarter of 2010. In the second quarter, we are projecting flat revenue with increased income from operations. Revenue guidance for the second quarter is $95 million to $100 million with earnings per share in the range of $0.17 to $0.21. The tax rate for the second quarter is currently projected at 15%.

In summary, during the first quarter of 2010 UCT continued to experience significant growth, exceeding the high end of our revenue and earnings per share guidance in a period of continued increase in industry demand. We continue to meet our customers' demand while focusing on operating efficiency. We are extending into new products in the flat panel and high brightness LED markets, as well as maintaining a pipeline of new products in our other [sub] markets. And we are increasing our overall production in Asia. In closing, we are very closed with our operating and financial performance. And we're extremely optimistic about the spring 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, Private Investor.

Thank you. Good afternoon. Clarence, a couple questions on the cycle. First of all, I guess the -- if you look at what a lot of the analysts are saying you can characterize cycle to date demand for equipment. is being largely driven by shrinks of existing fabs.

But there seems to be this expectation, that as we roll through the back half of this year and into next year there's going to be a transition to new wafer start capacity expansion, especially with NAND flash waking up. That intuitively would be better for plasma-based tools than shrinks which is more litho intensive. So, is your guidance for flattening, in your opinion, a transitional period before we enter a second half of the cycle so to speak or something different?

Sure, Jay. And again, we do not give guidance out beyond one quarter. We are not in a position to do that. We do get feedback from our customers. We do have build visibility into their bill schedules and we certainly get a lot of feedback in terms of their general long-term thinking. I remain very confident that we are still at the early stages of a long term cycle.

Most of the up turns that we've seen have traditionally lasted 18 months to three years. I believe that we are still in the early stages of that. And my customers all remain very optimistic. I think by and large we are seeing a general stabilizing in demand in the short-term from our customers, particularly on the semiconductor side. But I would expect to return to growth later this year or early next year.

Okay. And then some analysts are actually talking about CapEx, semi CapEx in 2011 being equal to or potentially a little higher than it was in '07. Given your broader customer base and your broader product portfolio, does that still equate to something like a one and a half to or better cyclical peak revenue potential for your company?

Sure. Again, Jay, I remain very confident in a cyclical peak of $150 million. Our previous cyclical peak in Q1 of 2007 was $110 million in revenue, of which roughly $100 million was semiconductor and $10 million was outside of semiconductor. We are, at this quarter, we did $78 million in semiconductor. So we have insight the peak levels we achieved in 2007 on the semiconductor side. I have every reason to believe we will reach or exceed that.

And I'm very confident in our ability to achieve one-third of our revenue coming from non-semiconductor sources equating to $50 million a quarterly run rate basis. And we see most of our new business opportunities are coming in these adjacent spaces and a lot of our strengths, in terms of our customer relationships, are coming in those areas. We are extremely excited about these new areas that we are penetrating and we see -- I am very strongly convinced that we will achieve or exceed $150 million per quarter run rate that we targeted.

Okay. And usually you announce new mandates with your earnings and I don't see any today. What's going on with that? And what's the sales pipeline look like?

Sure. Again, we always do like to have some major announcement to make. We don't have any major announcement that I can talk about at this point in time. We do have quite a few minor wins, but I don't normally talk about those.

Our pipeline remains very full. I am very optimistic about our wins not only within the semiconductor space, but also in some of these adjacent spaces. We are very optimistic about the high brightness LED market. We think that's going to be a strong growth area for us later this year.

And in the LED market are you looking at sub systems or full systems or a combination of the two?

We are looking at sub systems but they are fairly expensive sub systems. The tools that we are looking at supporting our primarily MOCVD tools. And the typical gas delivery system or chemical delivery system on a MOCVD tool is about 2.5 times the cost of a typical gas or chemical delivery system on a front end semiconductor process tool. So, that market is projected to triple over the next three years. And we think we can be a very significant participant in that market.

Okay. Thank you.

You're welcome.

Our next question comes from the line of Edwin Mok with Needham & Company.

Hi. Thanks for taking my question and congratulations on a good quarter. First. Can I ask you guys in terms of bookings versus your shipment that you booked more than you should in March quarter?

We don't really -- we don't really talk about -- we don't think of ourselves in terms of bookings. We think of ourselves more in terms of turns business or turns company. So we get really -- we don't typically have what you would consider firm bookings. We get slotting schedules and we are assigned positions on the slotting schedules. But essentially what we are saying is our bookings for Q1 are relatively flat.

I see. Great. And then in terms --

On the semiconductor side.

Yes. I understand. You were referring to that. In terms of your operating expense. I know it expanded quite a bit from the fourth quarter of last year to this year -- this quarter, and was that from stock expense or why did that increase so much?

It's a combination of things. I think traditionally we talked about operating expenses running around 8% and as you get up in the cycle between 7% and 8%. And I think we will continue to run there. We had some expansion spinning that happened in Singapore for the facility there and some other costs that also factored in. But, I think if you think in terms of 8% and then as we ramp maybe coming down off of that, that's probably a fair place to think about it.

Great. That was helpful. Then I guess along Jay's line of question regarding LEDs, I was wondering on the LED side. You mentioned that on the prepared remarks that you expect to have quite meaningful ramp in the fourth quarter of this year. Is that just from what your existing customers indicating to you or you expect to win new contracts to drive that comp growth that you are projecting?

It's too early for us to talk about new contracts. Obviously, we are hopeful that that can happen. But most of what we are talking about is based on customers that we are currently supporting.

I see. Great. And then I noticed you didn't mention the solar part of your business on the prepared remark. Is that lingering as you mentioned last quarter?

That's still been lagging business opportunity for us. Our -- we have one primary customer in that space and the thin film side. We haven't seen any significant growth in that market. We are supporting that to limited extent that represents between 1% and 2% of our total sales right now. But we have not seen a significant growth in that aspect of our business. And we don't have anything built into our projections for the near-term future.

Great. Just two more questions and I will go away. First one is if I listened to your customers talking about the ones that have reported so far. They sounded more optimistic about the second half outlook part because of the semi industry is becoming better.

I understand typically you have more turns-- but based on the conversation that you have your customer over the last few weeks or past month did you sense a better outlook in the second half of this year or can you share with us what you are hearing on that end?

I don't want to give any indication of any negativity relative to the second half. Frankly, with a we are hearing from our customers and what we seen with recent increases in orders would lead us to believe that the second half is likely to be significantly stronger.

But we don't give that guidance and we really look to our customers to give that longer term guidance. I hope none of my remarks are in anyway construed to believe that I'm being conservative about the second half on the contrary. We think things are going to go well.

Great. And I guess one last question. In the March quarter, you beat your guidance by quite a wide margin. Will that in fact you saw that happened in the March quarter meaning from the June quarter to the March quarter?

Yes, this is Clarence again. No. We have not seen any significant [pull-ins] from our customers. What we have seen recently frankly are increases in demand for Q2.

Great. That's all I have.

You're welcome.

Your next question comes from the Shawn Boyd with Westcliff Capital.

Good afternoon and congrats on the quarter.

Thank you. Thanks a lot.

I just wanted to come back to the situation with the delays from the suppliers. We still have delays in the quarter but I got the sense that it improved a bit as we went through the quarter.

And what I'm wondering is, can we flush that out a little more in terms of is that due to the changes that you guys put in place as we went through? Or just us getting further into the cycle and things calming down a bit so that we don't have as many component constraints?

I think it's more the latter. What you said is we were now -- what I wanted to make sure that we communicated effectively was that we were not offering. We aren't wildly excited about the gross margin levels that we are at. That represents obviously an increase from where we were last quarter.

But we, under normal operating conditions where we were operating fully efficiently, would have expected higher gross margins. And a large part of that is because of our some of our inefficiencies in manufacturing dealing with components that were late or mostly late that caused us to have to delay our build schedules and re-adjust our build schedules or partially build up tools before we can finish them and ship them. So that has gotten a lot better. I don't anticipate that being a factor in the second quarter as our demand has stabilized. Our suppliers are now beginning to catch up.

And so that is one of the reasons why we are confident that we will be improving our margins and profitability in the second quarter. But I did want to make sure that it's clear that this was a factor in not our overall dollar shipments. We essentially ship everything that we needed to ship and it was critical to our customers and we didn't cause them any delays. But it did impact our efficiency and as a result our profitability.

Got it. And hit you both on the gross margin line and operating expense line.

To a certain degree. The operating expense side really, is like I said, a combination of things. To a certain degree is more catch-up in some elements it's catch up to zero spending in a lot of areas. As we try to build things out I mentioned Singapore as an example. Then I think you see a little bit more there. I think the guidance I gave is the right way to think about OpEx.

Very good. Thank you.

You bet. You're welcome.

(Operator Instructions) Your next question comes from the line of Michael Bertz with Kennedy capital.

Good afternoon, gentlemen. I just want to follow up on the operational model and your ability to continue driving efficiency up. So you look at the (inaudible) inventory which you talk about stabilizing in Q2, do you see the ability to continue holding that on a fairlyflat level as you continue to drive revenue up? Let's say that the second half is stronger than the first half, to say that it is, can you hold inventory or do you see meaningful increase there as well?

Again, obviously, that's dependent on the ramp and the volume that you see out in Q3 and Q4. Right now I think we have the opportunity to get more efficient in the way, again, we are dealing with our inventory. We've gone through quite a bit of a ramp. So, I don't see big movements up in our inventory as we go unless there is another demand cycle that really requires us to get in front of it.

You aren't going to see efficiency this quarter because you carry some inventory over from quarter to quarter, so it takes little time to react there. But I think that we are at a point now where, as Clarence mentioned, on the operating side. We can begin to control the inventory and actually drive it down at the same levels and that's why we are saying it's stabilizing.

This is Clarence. I'd like to add on to that. In a situation where certain suppliers are late in their deliveries, we still have the inventory for all the other components that were delivered on time. So the fact that we are -- we're experiencing some shipment delays by suppliers in Q1 would naturally lead to higher levels of inventory than we want to have. As we become more efficient, we would expect our inventory levels per revenue dollar to be going down.

Okay. Great. Thanks. I understand, in terms of the income statement, I'm looking at it. You talked about you want the cost margins to improve and expect the operating margins to improve as well. Can you talk about as you look at this next peak model as you think about, how do you think that's going to expand versus your last model? And what improvements would you specifically look to see there?

Again, historically about the best we've done on the margin line is right around 15%. And on the operating income line in the 7.5% give or take. We've talked about going from the 8% and -- or the 15% on gross margin and the 8% operating to levels of 18% and 10%. And that's driven by two things. One is that it's driven by volume. But as importantly or more importantly, it's driven by the continued transition of our business or some of our business over to Asia.

As we are able to do that, we can get a little more leverage in the model. And so depending how those two cross in this cycle, we feel comfortable with our guidance that we ought to be able to generate 15% to 18% gross margins and 8% to 10% operating margins. So, depending how quickly you get to the peak and how much we have been able -- we talked about getting to over 50%, in Asia but that's out two or three years. So, depending where those cross, that gives you the margin guidance on the operating and gross basis.

Okay. That's helpful. Thanks. Congratulations.

Your next question comes from the line of Jay Deahna, Private Investor.

Casey, what's the plan for grinding the tax rate back and where will it ultimately settle out?

Well, we traditionally been around 20% to 25% as a tax rate when the international structure went in. So as we look at it, we are looking at with building out Singapore and putting continued focus in Singapore. We were looking at our structure and how we move forward. Obviously, the tax laws are changing around that as well.

I think if we continue to operate through this year efficiently and can get the right structure in place we ought to be able to stay in the 15% to 20% range anyway. I don't think that we will get back up over the 20%. But, then again, there is a lot of moving parts in taxes. Getting down below 15% back down to 10%, is on a sustainable basis, pretty difficult to do as a US- based company with as much revenue as we have to date coming out of the US.

Longer term, you have some opportunities there. But it's really a matter of leveraging the tax structure in the rates that we have internationally against the source of the revenue, which right now, still is predominantly in the US.

So you guided to 15% in Q2, right?

Right. Correct.

And so are you suggesting that in Q3, Q4, the highest that could go would be 20% or 25%?

I think 20% to 25% is a high-end rate. I think that again, if we can manage things -- taxes can be difficult to project. But depending where the source of the income comes and what we look at for the rest of the year. I'm hoping to keep that at 20% or lower for a full year. But again, I'm continuing to work that in with Singapore coming online and setting up a new agreement with the [EDB]. It's a work in progress right now.

Okay. So now if you look at your overall margin structure from gross all the way down to net. Going forward here for the next three to four quarters, it sounds like you are suggesting you are going to have an improvement and operating leverage.

And that could be driven by such things as improved overhead, due to volume, a mix shift to Asia, lower overtime, less expediting, getting some of this operating stuff through the pipeline so Op Ex grows slower than revenues and a stabilizing tax rate. Is that all correct? Am I missing anything?

I need to bring a Jay in-house here. He's got a pretty good handle on what we need to drive this business. Yes, you are absolutely right. I think that as we get more operationally efficient is a big driver. The mix of revenue between Asia and the US is a big driver and then the volume. Those are probably the three big drivers that I see right now and I think what you outlined is a pretty good summary of most of it.

And then the good news, as the operating leverage happens, you're not going to lose it on the bottom line through a rapidly expanding tax rate.

Yes.

Again, depending on the mix I tried to characterize that appropriately. But no, we are hoping to stay very efficient from a tax rate standpoint. As you know, we've used up and we've gotten I believe about $8.5 million back in taxes over the last two years by utilizing our NOLs on federal basis in particular but even the foreign stuff. The good news is we have the cash, but we don't have that to leverage our rate down going forward.

Clarence, on a separate topic, in the last couple of cycles, if I remember correctly, [Solarity] was one of your primary competitors on the gas delivery sub system side. They've had their trials and tribulations through the downturn and ultimately were sold off. Have you seen any share gain as a result of their issues?

It's difficult for me to say. They've now been acquired by another private equity fund and they changed the name. It's now called [I-core]. So they remain a viable competitor. Our customers will not allow us to be a sole source in the space so we will always have a competitor. They seem to be a reasonable competitor and so -- whether we picked up market share, I don't know. Difficult to say.

But I'm very confident that we will, at the very least, retain our market shares overall. And I'm confident that we are in a strong position -- strong position, vis-a-vis our international manufacturing capabilities to continue to grow our relationships with our key customers.

One of the thing, I want to add-on to your previous question and comment, was specifically regarding improved profitability associated with our Asian manufacturing operations. We are now moving very aggressively on our Singapore operation. We will be holding our grand opening in May of our Singapore facility. Our major customer is -- now one of our major customers is now migrating to Singapore. They had their grand opening earlier this month.

So I would expect to start see -- seeing more significant transitions to Asia. We are now over 20%. We are around 21% in Asia now. But, I would expect that to grow significantly, as we move toward the end of the year -- as we start to ramp up our Singapore facilities in support of our major customer, who will be manufacturing in Singapore as well.

Great. Okay. Thank you.

You're welcome.

(Operator Instructions) We have a question from the line of Edwin Mok from Needham & Company.

Hi, guys, a quick follow-up. I may have missed it. Did you talk about how much your revenue came from Asia in the March quarter or what you expect in the June quarter?

We did not say what we expected in June quarter. We did say 21% of our revenue. So just over $20 million came out of our Asia facility. And that was an all-time high for our Asian facilities.

So, we are very pleased with momentum we have going there. And we have not even yet officially opened up our Singapore facility. So, once we do that, we would expect the migration to Asia to accelerate.

So, in terms of timing of that. Do you expect that to start kicking in in the second quarter? Or more like second half of this year?

More like second half. We will have some increased revenue in Q2. It's going to be a greater impact in Q3 and Q4.

And as I talked, Edwin, to get to the levels -- I talked about, it's actually a longer term story than even that.

Great. So that implies that your margin expansion in the June quarter. That is not really driven by your transition at least not to Singapore, right?

That's correct. Not in Q2. Future margin expansions in Q3 and Q4 would be more tied to the increased migration or sooner migration scheduled migrations to Singapore and Shanghai.

Great. That's all I have. Thank you.

You're welcome.

There are no further questions in queue.

All right. Well, I appreciate everyone's calls as always. We are happy to try to answer questions. We will be out at JPMorgan conference in a few weeks and then beginning of June, out at UBS. Hopefully, we will get a chance to get everybody continued update on our business. Thanks a lot.

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