Ultra Clean Holdings Inc (UCTT) 2010 Q3 法說會逐字稿

Good afternoon. My name is Rachel and I will be your conference operator today. At this time I would like to welcome everyone to the Ultra Clean Technology third-quarter financial results conference call. (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. Casey Eichler. Sir, you may begin your conference.

Thank you, Rachel. 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. 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 1, 2010. The press release can be accessed from the Investor Relations section of Ultra Clean's website, along with information for the tape delay and replay of the live webcast at UCT.com.

Together our recent issued press release, this conference call enables the Company to comply with the SEC Regulation for Fair Disclosure. Therefore, investors should accept the contents of this call as the Company's official guidance for the fourth quarter of fiscal 2010.

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 guidance -- 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.

As we discuss today, include forward-looking statements as defined in the US Private Security Litigation Reform Act of 1995 related to matters including our future 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 events or circumstances that occur after this call.

Now here are our third-quarter results. Revenue for the third quarter was $118.5 million or an increase of 12% from the prior quarter and an increase of 187% when compared to the same period a year ago.

Semiconductor revenue for the third quarter was $95.4 million, an increase of 13%. And non-semiconductor revenue was $23.1 million, an increase of 10% when compared to the second quarter.

Gross margin for the third quarter increased to 14.5% compared to 14% in the second quarter and 7.9% in the same period a year ago. Although revenue and margin were at record levels, we continue to focus on operational efficiency in our gross margins.

Operating expenses were $8.7 million or 7.3%, an increase of approximately $449,000 from the prior quarter. Our operating expenses as a percentage of revenue should continue to be in the range of 7% to 8% as previously discussed.

Our operating income was $8.5 million or $0.37 per share before interest expense and income taxes, compared to an operating income of $6.6 million or $0.29 per share in the second quarter.

An income tax expense of $1.6 million or $0.07 per share was recorded in the third quarter. The tax rate for the fourth quarter should be modeled at 20%, but there are several factors that could significantly impact the rate, including the valuation allowance related to our deferred tax assets. In addition, recently passed law in California will affect our ability to utilize net operating loss carry forwards.

Third-quarter net income was $6.7 million or $0.29 per share. This compares to a net income of $5.7 million or $0.25 per share in the second quarter.

The fully diluted share count was 23.1 million, an increase of 44,000 shares from the prior quarter.

Non-cash charges for the third quarter were $865,000 related to FAS 123R, an increase at $296,000 compared to the same period a year ago, and $604,000 related to depreciation and amortization.

According to the balance sheet, cash increased by $4.6 million from the prior quarter. Cash, net of third-party debt, increased $5.1 million during the period.

The Company has just completed a new working capital financing and term loan with our banking partner, Silicon Valley Bank. The terms increase our working capital line from $20 million to $25 million, and establish a new term facility of $8 million. In addition, we have extended the maturity to December 31, 2013. We will discuss the details in our quarterly filing.

Accounts Receivable was $46.6 million, up $863,000 from Q2. And days sales outstanding decreased to 35 days from 39 days. Accounts Payable of $51.4 million increased approximately $8.1 million. Days payable outstanding at the end of the third quarter increased to 46 days from 43 days at the end of the second quarter.

Net inventory was $64 million, an increase of $9 million over the prior period. Inventory levels are projected to decline during the fourth quarter.

Now Clarence will discuss our operating highlights for the third quarter.

Thanks, Casey. I am pleased that during the third quarter of 2010 UCT achieved all-time high revenues and earnings. Our revenues were $118.5 million and our earnings per share was $0.29.

As Casey said earlier, the third quarter saw an overall revenue increase of 12%, with a significant improvement in our gross margins.

Revenue from our Asian operations increased from 26% of total revenue in Q2 to 30% in Q3, an increase of 28% quarter-over-quarter.

Our non-semiconductor equipment revenue increased by 10%, while our semiconductor equipment revenue increased by 13% quarter-over-quarter.

While we are pleased with our record-setting performance, we are disappointed that we did not come closer to the high end of our guidance range. This was primarily due to order push outs late in the quarter by several of our semiconductor equipment customers, which reduced our anticipated revenue and increased our inventory.

In the fourth quarter we anticipate a slight decline in overall revenue, with a small decline in semiconductor equipment demand nearly offset by an increase in demand for products in other target markets.

I will now provide highlights of our activities and accomplishments for the third quarter. Our total non-semiconductor revenue for the quarter increased from $21.1 million in Q2 to $23.1 million in Q3, a 10% increase.

Overall revenue in all served markets increased quarter-over-quarter, except for a small decline in the flat panel market. As stated last quarter, our biggest near-term growth opportunity by far is in the high brightness LED market.

During the third quarter we shipped several orders for LED-related gas delivery systems to multiple customers for a total of $2.4 million in revenue, up from $1.8 million during Q2.

We have received additional prototype and production orders from multiple customers, which we anticipate will result in shipments of greater than $6 million in the fourth quarter. Further, we expect significant growth in this market beginning in Q1 of 2011.

In general, our relationship with all of our customers remains very strong. Our Asian manufacturing operations are continuing to grow, and in the third quarter we achieved a new record high of 30% of our total revenue shipping from Asia, up from 26% in Q2 and 21% in Q1.

A majority of this increase came from our China operations, which achieved its highest revenue since its establishment in 2005. We anticipate ramping production and achieving profitability in our new Singapore facility during Q4.

As stated during previous calls, over time we project continued increases in the percentage of revenue from our Asian facilities, with the transfer of US production to China and Singapore in support of the activities of our key customers.

The focus on transferring additional products from the US to Asia is a critical activity for achieving our financial goals.

I would now like to shift to our guidance for the fourth quarter of 2010. In the fourth quarter we are projecting a slight decline in revenue and EPS. Our revenue guidance for the fourth quarter is $110 million to $115 million, with earnings per share in the range of $0.20 to $0.24. This is inclusive of one-time employment-related charges that will result in lowering EPS by $0.02 per share.

As Casey discussed earlier, the tax rate for the fourth quarter should be modeled at 20%.

In summary, during the third quarter of 2010 UCT continued to experience significant growth, generating record revenues and exceeding our record earnings-per-share.

We continue to expand revenue from our Asian operations, and we grew revenues from our adjacent served markets. Looking forward we anticipate an increase in significant new business opportunities, particularly in the high brightness LED market in Q4 and beyond.

In closing, 2010 will be a year of record revenue and profitability for UCT. And we are confident that 2011 will be a year of continued growth as we further expand into new markets.

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

(Operator Instructions). Edwin Mok.

The first question is on your third-quarter results. It looks like it came in the lower end of guidance. I remember you guys talked about last quarter that your Photon Dynamics, or Orbatech, potentially ramping to $10 million -- or close to $10 million this year. But it sounds like 3Q you said flat-panel is down sequentially. Is that just a pushout on that customer?

Hi, Edwin, this is Clarence. Yes, from a third quarter overall standpoint Orbatech did put one of our customers -- our flat-panel customers did push some orders.

But that is not the bulk of the movement to the low end of our guidance range. The movement to the low end was really associated with several pushouts of orders from our semiconductor equipment customers toward the end of the quarter.

So we are very confident in our relationship on the flat-panel customer, Orbatech. So there was a delay there, but that was not the primary reason in moving towards the lower end of our guidance range. The primary reason was associated with our semiconductor customers having a lot of changes in mix towards the very end of the quarter, which resulted in -- that caused some pushouts in deliveries.

Great, thanks for clarifying that. So on the assembly side, you mentioned there is some changes in mix, and 4Q you're guiding lower. Is that also -- especially given that you have a LED business ramping, so is that also based on assumption that on semi business will be down again sequentially in the fourth quarter?

When you talk about mix or change in mix that caused the pushout, is that just your customer is starting to see some changes on their customer, or is it just that they are shipping to a different customer and therefore caused them disruption in operation, if you will?

Sure. Again, this is Clarence. I guess the first comment I would make is you used the words down again with regard to semiconductor. It is not down again. We were actually up 13% on semiconductor last quarter. So this is the first time in quite a while we have seen any slowdown on our semiconductor side.

And from a standpoint of customers, it could be a mix issue. I'm not sure, I don't think it is. I think it is actually some pushouts of some orders that we have seen.

I see. Okay, can I ask you about, I guess, the linearity in the fourth quarter, if you will? Based on your current guidance you expect shipment to be more backend loaded this quarter or is it more (somewhat] linear within with in the quarter. How do we think about that?

That is always very complicated. I think at least one of our major customers is planning a move during the end of the quarter, and they are planning to have a shut down at the end of the quarter.

I think other customers are potentially thinking that they will have slowdowns around the holiday season. My guess is that we will probably see things more heavily loaded into the middle -- towards the middle part of the quarter as opposed to the end of the quarter. But that remains to be played out.

Does your customers give you any kind of visibility going in 2011?

It is really a little too early for us to have visibility into 2011 right now. Most of our customers are indicating generally flat going into 2011. Nobody has given us any extreme negative signs. I would be shocked if we saw a significant decline in -- certainly in the beginning of 2011. Most of our customers are expecting it to be relatively flat.

Great, but on your LED business you expect to grow from that $6 million quarterly run rate that you are seeing in the fourth quarter?

Yes, the orders we are seeing on the high brightness LED side, those are really just the beginning of our production orders. We are actually -- to give you an idea, we are actually in the midst of a facility expansion in one of our facilities, and we are bringing on a lot of new people to accommodate the projected ramp in some of the high brightness LED opportunities.

So the $6 million we believe, and we have now got production orders to support this, we believe that we are still at the very beginning stages of the high brightness LED opportunities for UCT.

As I've mentioned before, we are targeting -- the portion we serve is the gas delivery market right now. We believe that that is a $400 million opportunity, and near-term we are targeting 30% of that. So roughly an opportunity of $120 million annualized, which could be $30 million a quarter.

Great, thanks. Then just two quick question the financials for Casey. I don't want to leave him sit there, not having any question to answer. So just quickly on the operating expense, on the fourth quarter you mentioned there is a $400,000 kind of one-time charge. Is that an OpEx item?

And then how do you think about your OpEx run rate going to 2011? It basically went from 7.8% to 8.7% in the last two quarters. Is that kind of the runrate that you are thinking about stabilizing or should we expect further increase, especially if you have this LED business ramping?

So on the first question, I think that -- I'm sorry, let me just -- I've got -- when I look at the ramp for the current year, as you said, we are about 8.7%. We started off the year on OpEx around 7.7% So I think the rate where we are at right now is relatively consistent.

Obviously, compensation, bonuses, things like that, profit sharing go into those numbers, as well as other things. But I don't see a ramp in OpEx. I think that remains consistent. As I said in my comment, I think it is between 7% and 8%.

I'm sorry -- the first question?

The first question is just the $400,000 one-time charge, is that a gross margin or OpEx item?

So there is a combination of a few things in there, but the vast majority of it is in OpEx. You are as fully right.

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

Dick Ryan.

Say, looking at the contribution from Asia going from 26% to 30% how should we look at that going through 2011? And obviously that would benefit gross margin going forward. Is that a lag effect and how should we think about that going into '11?

I will let Casey address the margin numbers. This is Clarence. In terms of going through 2011, we expect to see continued significant -- we may not -- next quarter we may not see an increase in Asian revenue because of most of that is semiconductor related, and so we have seen a slight decline in semiconductor, so that won't be a significant growth factor in Asia in Q4.

But moving into 2011, we expect to see continued significant growth in Asia as we continue to ramp our Singapore facility. One of our major customers is making a major movement to Singapore, and we expect that to influence primarily our Singapore facility, but also our China facility.

And I absolutely believe that within the next couple of years we will see the majority of our revenue coming from Asia. So you can probably linearize that over the next couple of years.

And to follow-up, as I have discussed in the past, as we continue to build our business there that does help increase our margin. So we would anticipate that that would help our margin over the course of next year.

Okay. A couple on the LED side. You mentioned the $6 million in Q4. Would you classify that as more prototype or are you starting to see the production orders -- or that production deliveries start to ramp there?

We are starting to see what we'd call production orders. So I would say you can look at it this way. We did $2.4 million this quarter, most of that was prototype work. So you can assume that our prototype revenue would remain at about that same level, $2.5 million to $3 million. So I would say it is split this quarter equally between prototype and production orders. But our expectation is to see continued significant growth going into Q1.

As I mentioned earlier, we are in the process of expanding our facility, and that does account for some expenses in Q4, but we are expanding our facility in Q4 to accommodate production volumes by the end of Q4 -- significant production volumes by the end of Q4. And we are adding personnel -- support personnel accordingly. (multiple speakers).

Now that facility, Clarence, is that domestic or are you moving that to Asia as well?

That is currently domestic. At some point we will evaluate Asian-based opportunities. And as these tools are ultimately mostly going to Asia, I would expect at some point in time a significant portion will be done in Asia. But for the foreseeable future those are all done domestically, and our expansion is domestic.

Can you say whether your production orders are deliveries to -- is it one customer or is it beyond one?

It is multiple customers. It is multiple customers.

On the production orders?

On the production orders, yes.

Great. I will get back in line. Thank you.

Jay Deahna.

A couple of questions here. The first one is right in the beginning of October there was a press release indicating that your Chief Operating Officer is no longer with the company.

In your press release today there was a line here that says this was a very challenging quarter for us operationally. The only thing you alluded to in the prepared remarks was you got a couple pushouts at the end of the quarter. Clearly that wasn't the previous COO's fault. So could you clarify what is going on here, and give us an understanding of the situation so we can put it to bed?

Sure. I will do the best I can. Obviously, there is -- in a lot of these cases there is not much that is appropriate to say. I will say, as you mentioned, that the delays and pushouts at the end of the quarter had nothing to do with our separation.

All I can say is that David and we, meaning UCT, mutually agreed that the departure was best for both of us, and we agreed that it was simply not a good fit. So that is pretty much what I can say on that topic. But it had nothing to do with our financial performance historically or going forward.

So what are you referring to in the press release when you say it was a challenging quarter operationally?

Just what I said at the -- what we said at the end there is that we have a lot of last-minute changes from our customers towards the end of the quarter, shifts from one product family to another product family. I am not sure what precipitated that on their end, but it really made it very challenging for us to achieve the revenue levels that we were targeting.

Clarence, just so I am totally clear, is it your perspective that the operational effectiveness of your Company, the ability to run your factories and generate desired financial performance, is that very much in place and you just got whipsawed with mix at the end and there just wasn't enough time to deal with it?

I am just trying to understand your core operations and where you think they are supposed to be.

Sorry. So the answer to your question is, yes. I absolutely believe that our operational efficiency and effectiveness has not been compromised in any way.

We are very comfortable with our relationships with our customers. We have visited all of our customers come and discussed the issues. And, obviously, have discussed with all site team members. So we are very comfortable that our operational efficiencies and effectivities have not been compromised. And we are also confident that our relationships with our customers has not been jeopardized.

Okay, well, glad to clear that up. Then shifting gears, by any account, given your current level of cash generation and earnings in the $7 to $9 range, your stock is extraordinarily low from a valuation perspective.

Given your confidence level in your operational capabilities, your confidence level in the ramp of the LED opportunity and the potential scale of that, your expectations that 2011 may be a growth year, the likelihood that you're going to lower inventories in the fourth quarter, wouldn't this be an obvious time to be buying back as much stock as you possibly could?

Jay, I am not a stock salesman. I am just very focused on running our business. But I am very comfortable with our business model. I'm a little disappointed that Q4 is not going to be an up quarter for us, but we have had a very long run of continuous run of up quarters, and who knows, things could turn around come the end of the quarter.

But the data that I am seeing right now does indicate a slight decline for the quarter. And I'm very confident that moving forward we will execute very effectively operationally as we always have done. I'm very confident that we will capture new business in new market segments, and that we will continue to grow into 2011.

Which is exactly the point. Why would you not buy back stock with your stock price at this level, given that outlook?

Again -- this is Clarence -- we still believe that we have other opportunities that might be more beneficial uses for cash. This is an environment where if a right M&A opportunity came along we would like to be in a position to take advantage of that.

Obviously, we are not M&A -- so heavily M&A focused that we would be looking at necessarily multiple M&A opportunities, but we did have a good experience back in 2006 with a significant M&A, and should an opportunity come along, we would like to be in a position to be able to utilize cash for that.

That makes sense. Okay. Thank you.

(Operator Instructions). Michael Bertz.

Thanks guys. Just a couple of quick things. One, we talked about the inventory coming down here into Q4. Obviously up a little bit, and I [have] understandings for the pushes, and you had to hold some of it. Do you see -- you talk about it being down, do you see it maybe being down back to where it was in Q2?

And what would you perceive the mix of that changing across what you have in inventory? You're going to be holding some of the things that got pushed maybe for another quarter? Are you going to see being able to use those components in other things? I guess, any thought around the aging of inventory?

So I would say that the inventory probably won't get back down to that level for a couple of reasons. One, Clarence talked about. Some things pushing out obviously brings the inventory up.

The other thing is we are ramping some new product lines, as Clarence has also referenced. And as you do that, and you have product mix that tends to put pressure on keeping some of the other inventory while you're adding inventory for the new products. So I think those combine to give as confident that we probably won't get down to that level, but we do think that we are working very hard to bring the inventory levels down, but probably not that far.

Okay. Then do you think it is -- it is hard to necessarily ask you to size it, but do you think you can get back under $60 million for the quarter or is that too far or is that too much to ask?

It is probably in the right zip code.

Then the other things you mentioned, Casey, on the car was about the ability to use your operating loss carry forwards. So can you explain that a little bit more?

Yes, so in California it turns out that we don't have as much money as we would like to have as a state, so we have just passed a budget for -- I guess the year that is just about over -- and in there was a provision that basically -- and this does happen last week -- that disallows your ability to use operating loss carry forwards.

California a while ago did away with what you can do federal. If you remember at UCT we have carried back the federal NOLs the last couple of years to help fund the business and drive things forward. California doesn't allow you -- I am generalizing -- carry backs. They allow you to carry it forward. Now what they're saying is they're not going to allow you to carry it forward, at least, I think it says this year and next year.

So at the end of every quarter you do a provision and try to see where you are, true it up through that quarter and move forward. Well, now here we are at the end of the year and, of course, we were thinking that we would have the ability to use those net operating losses going forward, and on first blush it looks like we're not going to. So we are going to have to true all of that up in the fourth quarter.

That is going to probably relatively substantially increase our tax liability, and in particular when you have to dump it all into one quarter.

On the other side of that, what I referenced is back in, I believe, Q2 of '09 we did a valuation allowance and wrote-off our deferred tax assets. We were losing money and it was seen by ourselves and our audit team as the prudent thing to do.

Now that we have been profitable for several quarters in a row, and see profitability going forward, at the end of the year -- at the end of that our fiscal year you would tend to go back and look at that and see whether or not that is still appropriate or not. If we were to come to the conclusion that it wasn't, that would be -- substantially reduce our P&L impact for tax expense for the quarter.

Then there is always other things you do at the end of a quarter to true things up. So I just thought that modeling it at 20% kind of keeps it consistent with last quarter, and seems to be a reasonable place for people to keep comparisons going. But that number could be dramatically different once we shake through the impact of California and the deferred tax assets. A little convoluted, but that is hopefully a better explanation.

That's fair. That's a fine explanation. Is that a reasonable range to think about looking into 2011 or should we thinking about increasing that slightly?

I think it will probably go up a little bit in 2011. Right now it looks like I have the same problem with California, so I'm not going to be able to have that NOL there as well. Now they could change that.

But we have kind of guided around 20% for this year, kind of forgetting all these other factors. And I think that we will probably see that rate go up probably still mid-to low 20s, but I think you're going to see that rate go up. I will give guidance on that next quarter, but just based off of California alone, I think you'll see it go up.

Okay, great. Thanks.

(Operator Instructions). There are no more questions at this time.

Well, I appreciate everyone dialing into our third-quarter earnings release call. And appreciate the opportunity to share the story with you. We are thinking that we have a great opportunity in front of us and appreciate the interest. Thanks a lot.

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