Ultra Clean Holdings Inc (UCTT) 2012 Q1 法說會逐字稿

Good afternoon. My name is Laporsche, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ultra Clean Technology second 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 Ms. Sheri Brumm, our Vice President of Finance; Mr. Casey Eichler, Chief Financial Officer; and Mr. Clarence Granger, Chairman and Chief Executive Officer. I will now turn the call over to Ms. Brumm.

Thank you, Laporsche. Welcome to our first-quarter financial results conference call. Presenting today is Clarence Granger, Ultra Clean's Chairman and Chief Executive Officer; and Casey Eichler, Ultra Clean's Chief Financial Officer. Casey 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 March 30, 2012. 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 second quarter of fiscal 2012. 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 changes in guidance, it is our intent that such updates will be done officially via public forum, such as a press release or publicly announced conference call.

The matters 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 events or circumstances that occur after this call.

Now, here's Casey with the first quarter financial highlights.

Thank you, Sheri. Revenue for the first quarter was $110.6 million, or an increase of 27% from the prior quarter, and a decrease of 13% when compared to the same period a year ago. Semiconductor revenue for the first quarter was $94.1 million, an increase of 36%, and non-semiconductor revenue was $16.5 million, a decrease of 7% when compared to the fourth quarter. Semiconductor revenue was 85% of total revenue for the quarter. Revenue outside the US was 32% in the quarter, compared to 29% in the prior quarter. Two customers had a revenue over 10% for the quarter, and the gas delivery systems business represented 56% of our revenue.

Gross margin for the first quarter increased to 14.2%, compared to 11% in the fourth quarter and 13.9% in the same period a year ago. While we are pleased with our margin expansion, we continue to drive several initiatives to improve our margins. Operating expenses were $9.4 million, or 8.5%, an increase of approximately $1.4 million from the prior quarter. This increase was primarily due to annual audit fees, no mandatory time off, and performance pay in the first quarter. Our operating expenses as a percentage of revenue will be in the range of 8% to 9% in Q2.

Our operating income was $6.3 million, or 5.7% before interest expense and income taxes, compared to $1.6 million, or 1.8% in the fourth quarter. An income tax expense of $1.5 million was recorded in the first quarter. The tax rate for the second quarter should be modeled at 24%.

First-quarter net income was $4.7 million, or $0.20 per share. This compares to net income of $1.4 million, or $0.06 per share in the fourth quarter without the valuation allowance. The fully diluted share count was 23.7 million, an increase of 409,000 shares from the prior quarter. Non-cash charges for the first quarter were $1.3 million related to FAS 123(R), and $705,000 related to depreciation and amortization.

Turning to the balance sheet, cash was $54.8 million, an all-time high for UCT, and an increase of $2.6 million from the prior quarter. Cash, net of third-party debt, was $30.9 million, an increase of $3.5 million during the period. We anticipate cash, net of third-party debt, to increase by approximately $10 million in the second quarter. Gross cash will decrease about $10 million next quarter, as we plan to pay off our line of credit.

Accounts receivable was $49 million, up $7.9 million from Q4, and days sales outstanding decreased to 40 days from 43 days. Accounts payable of $39.1 million increased approximately $9.6 million quarter-over-quarter. Days payable outstanding at the end of the first quarter increased to 37 days from 34 days at the end of the fourth quarter. Net inventory was $61 million, an increase of $5.5 million over the prior quarter, in part due to customer demand early in Q2. Inventory levels are projected to decline during the second quarter.

Now, Clarence will discuss the operating highlights for the first quarter.

Thanks, Casey. During the first quarter of 2012, UCT performed very well. Not only were we able to beat the high end of our revenue and earnings guidance, but most importantly we were able to do so at significantly higher gross margins. Our revenue for Q1 was $110.6 million, and our earnings per share was $0.20. On our previous earnings call, we had guided to Q1 revenue of $105 million to $110 million, and $0.15 to $0.18 earnings per share.

A majority of our revenue increases during the quarter occurred with our semiconductor equipment customers. Semiconductor equipment-related revenues increased from $69.1 million in Q4, to $94.1 million in Q1, or a 36% increase quarter over quarter. In addition, revenue from our Asian operations increased from 29% of total revenue in Q4 to 32% in Q1. Our gross margins for Q1 were at 14.2%, a 3.2 percentage point increase from Q4.

With regards to cash, UCT's cash levels are at an all-time high of $54.8 million, an increase of $2.6 million quarter over quarter. And we anticipate a significant increase in cash during Q2. Finally, we received several new business awards during Q1.

I will now review highlights of our activities for the first quarter. In March of 2011, I announced that UCT had hired a new President and COO, Dr. Gino Addiego and that one of his primary objectives was to restructure UCT operations with an emphasis on improving our gross margins. I'm very pleased that we are beginning to see the results of these efforts.

In Q1 2011, at a much higher revenue level of $126.7 million, our gross margin was 13.9%. And in Q3 2011, at a revenue level of $105 million, fairly comparable to revenue in Q1 2012, our gross margin was 12.2%. This overall improvement in gross margin during Q1 is related to specific programs that have been implemented within UCT operations. And we expect these actions to result in further improvements moving forward.

During the first quarter, revenue from our Asian manufacturing operations increased from 29% of total UCT revenue in Q4, to 32% in Q1. This was mostly due to the increase in our percentage of sales to semiconductor equipment customers whose products are primarily built at our Asian manufacturing sites. We anticipate continued ramping of our Asian operations as a percentage of total revenue during Q2 and beyond. As mentioned in previous calls, this is a result of our customers' continued plans to migrate more of their supply chain to Asia.

During our Q3 and Q4 earnings calls last year, I discussed the fact that FEI Corporation intended to bring their US manufacturing back under their management by the end of March 2012. This transition has occurred, and as stated previously, we will continue to see an income stream from FEI through Q3 2012 by assisting in all ways necessary through that timeframe. This will be discussed in more detail during our Q2 conference call.

Although our FEI business relationship has terminated, we have some exciting new opportunities with our existing and also new customers. During Q1, UCT received several new business awards. One of our largest customers awarded UCT the next generation gas panel for their cleaner tool. This is a division that UCT has never supported. The current generation of this product is in high-volume production, and if this new product is successful in the marketplace, it would represent a multi-million dollar opportunity for UCT in 2013.

We also received an award for the design and build of our first 450-millimeter gas delivery system for one of our major customers. In a different market, we have received orders for modules and gas panels from a well-funded start-up company serving the OLED market. We made an initial shipment to this customer in Q1, and will make follow-on shipments in Q2 totaling about $1 million in revenue.

In the medical market, we added one new small customer, and most importantly, we are now making initial shipments of robots for Intuitive Surgical's next-generation robotic surgery tool. This is critical to UCT because not only are we maintaining our 100% market share on the robots, but in the next-generation tool, our level of content, and hence, our revenue, will be significantly increased.

Finally, the relationship with Bruker Corporation that I announced during our last quarterly earnings call is proceeding as planned. We are making shipments of our initial products, and we are in discussions with them regarding new opportunities.

I'd now like to shift to our guidance for the second quarter of 2012. In the second quarter, we are projecting a slight decrease in revenue and EPS, primarily associated with the decline in revenue from FEI. Our revenue guidance for the second quarter is $100 million to $105 million, with earnings per share in the range of $0.16 to $0.19. As Casey discussed earlier, the tax rate for the second quarter should be modeled at 24%.

In summary, during the first quarter of 2012, UCT experienced a recovery from the industry-wide slowdown of the previous two quarters. We were able to beat the high end of both our revenue and earnings guidance. And most importantly, we were able to demonstrate a significant improvement in our gross margin with a potential for further improvements moving forward. Our cash position is the strongest it has ever been, and we anticipate further significant additions to cash next quarter. Our migration of more manufacturing to Asia is proceeding as projected. And finally, although we have experienced a change in our relationship with FEI, we are experiencing expanded business opportunities with other customers, both existing and new.

In closing, we anticipate Q2 to be another strong quarter for UCT, and we are confident in our business strategy and our ability to implement that strategy. With that, operator, we would now like to open the call for questions.

(Operator Instructions) Edwin Mok, Needham & Company.

Congrats for the quarter. Let me first start by asking you, on the non-semi side was down modestly sequentially, was it all FEIC or is some other business also declined sequentially?

This is Clarence. Thanks for your kind comments. No, the decline was not with FEIC. We didn't actually experience any decline with FEIC in this quarter. So I'm not sure how much the decline was with other customers, but I don't think it was particularly large.

It was kind of across the board; it was around 7%.

I see. Okay, that was helpful.

There's nothing really to point at there, Edwin.

It was not with Intuitive Surgical. Intuitive Surgical continues to be very strong.

So maybe I would point to the LED area, which was already very low last quarter; did you guys see any pickup there?

No. The LED, unfortunately, I don't think we are going to see a comeback in that until at least Q3, maybe Q4 or even beyond. LED was still below $1 million last quarter. Right around the $1 million level.

I see. That was helpful. For the guidance for the coming quarter, you mentioned that FEIC is expected to be down sequentially. Are you guys monitoring any revenue from FEI, because it sounds like you guys are not ready to provide more details there yet. So at least you can help us count, not just directionally, but at least magnitude wise, that is based on the guidance? And then the other question I have is on the core semi, are you modeling just flattish? Is that what leads to kind of a sequential decline there on the top line?

Sure. Most of the decline will be in FEI next quarter, almost all of it. With regard to semiconductors, so it is relatively flat next quarter. As I said, all the decline will come in FEI. The FEI revenue will be almost zero moving forward. We do have some products that we'll continue to sell to them, but essentially, that's the biggest decline that we'll be experiencing in revenue in Q2.

I see, so you expect some marginal revenue there. I guess the question regarding semi, so it was a very strong balance this quarter and you guys expected in the coming quarter to be flattish. I know that obviously you drove visibility is somewhat limited, because even your customers are saying their visibility is limited, but any kind of thoughts beyond the current quarter? Do you think that you're just maintaining this level, there's room for growth or there is risk for that? Give me some general --

Yes, I would say on the semiconductor relative to the industry itself, it looks like Q2 will certainly be relatively flat. That's kind of the input we are getting from all our customers. Again, the general information we are hearing longer term is relatively flat in Q3 and Q4. It sounds like some of our customers are saying this first half and the second half should be relatively well balanced.

For ourselves, we are starting to see some new product wins and so we do actually expect, over time, our revenue associated in the semiconductor industry to start increasing. Specifically I mentioned one new opportunity associated with the cleaner module that we will providing and also the cleaner gas delivery system and also a 450-millimeter tools as we start to make those. I think there's some opportunities for us for growth in the semiconductor side, primarily through the new business opportunities and some market share gains.

I see, yes. That was helpful. Just regarding the cleaner, it is a tri-product, right? Your option there is a gas panel option, is that correct?

We will be providing a gas delivery option, gas and liquid delivery option, but it is not a dry cleaner. It is a wet cleaner.

Great. That was very, very helpful. It looks like Asia is ramping, at least sequential is up quite a bit sequentially and helps you on the gross margin area. As you look through the year, I know in the prepared remarks you talk about Asia potentially being higher, but is that susceptible to your customer mix and as your Asia mix continues to improve, do you see yourself expanding beyond this 14.2% that you just printed on the first quarter?

Yes, and let me take that. So Asia, I think, as I mentioned, was up from 29% to 32%. That does help with the margin but I would say it didn't really drive as much of the margin as some of these operational changes and improvements that we've made really drove the margin. I think you'll see more business continue to move to Asia, and in particular some of the low cost region business into China, and that will help us.

I think that, as you know we control to a certain degree, but what we can control is a lot of the things that the operations team and the finance team have been partnering on to build on, and that piece, I think, was more responsible for the improvement than the mix in Asia.

To double back onto the first question you asked, Clarence, just to be clear, if you were asking the question about driving our semi versus non-semi, obviously the semi was up, because I said there was nothing in particular there, it was up to 85% because of strong kind of overall performance in semi, the rebound from Q4 to Q1.

If the question was related to did FEI impact the non-semi piece of the business, the answer is yes. It was down quarter-on-quarter, but there is not anything to read into that. It is just a matter of how we were transitioning from the old model where we were manufacturing everything to the new model, which we're going to have for the next couple of quarters. But there was nothing to read into that, but if that was the question, some of the weakness on the non-semi side was because FEI was down quarter-on-quarter.

Great; that was helpful. Sorry, I have two more questions.

I just wanted to make sure you're clear.

Yes, and I was just looking at the revenue on the non-semi side, it was almost dead flat in terms of dollars. So as a percentage, it was down but it was almost dead flat in terms of dollars. And without the decline in FEI, it would've actually been up.

Yes, that's right. So can I ask you one question regarding the -- you mentioned several opportunity, Clarence, for obviously more of the 2013 time horizon, right, but any way you can size up those opportunities? Specifically with Intuitive Surgical, it sounds like you're pretty confident, not only that you have in the next generation, but you are confident that your revenue opportunity there could be expanding because of the increased level of content? But is that something that is more immediate or is it just you guys are still at the early stage here and we won't see real revenue until 2013?

Yes, we would probably see a couple of million dollars in revenue associated with that in 2012, but the big hitter is in 2013. It is hard to get too specific on some of this stuff, but the content that we have associated with the next-generation robot, there's more complexity and there's a greater part that UCT is providing than we provided in the past. We could see a dramatic increase in our revenues with them next year as they start to introduce this. It could be a greater than 50% increase in our Intuitive Surgical business. Overall, the new product opportunities that I have discussed today in total would be greater than our revenue with FEIC in 2013. Our total revenue with FEIC was -- and -- by 2013.

Great. That was very, very helpful. A few of your large customers in the semi area has gone for a merger, right, so your experience applied by Varian, and Lam overseas is starting the process of integrating Novellus although the deal is not done.

I was wondering, in your discussion with these two large customers, have you seen any change in terms of their thought process in terms of how the outsourcing strategy there? And specifically for example in Varian, since the deal is already cut for a great few months, have you seen incremental opportunity there or are they still working through that? Can you give us some sense there?

I would say if anything, Edwin, we have an opportunity to be a beneficiary here. We are a very large supplier to all four of those customers. We are very well respected by all four of those customers. As they start to look at ways to consolidate their supply base, we think we're in a very strong position to be a beneficiary of that. So far, with Varian, it is been -- they are still relatively in the early stages, but everything we've heard is relatively positive. It is positive relative to UCT and so we think this is ultimately going to be a good thing for us.

Krishna Shankar, ROTH Capital.

Congratulations on a good quarter. Beyond the flattish outlook in semi equipment for Q2, what do you think could be the drivers in Q3 and Q4? Do you think that a pick-up in foundry spending, where recently there's been some indications of tight capacity, and perhaps LED coming back, would that offset maybe some decline in memory spending or what are your thoughts on sector spending within semiconductors?

Yes, I think it is now becoming very public that the demand on 28-nanometer is very tight, and so we expect to see increasing demand in that area which we should benefit from. We know a lot of Intel's purchases are going to start occurring in the second half. So we think that's very positive for UCT. So LED demand, obviously, at some point that is going to come back. The question is when, not if. So we expect that to be a very significant driver for us when it comes back. It is difficult to predict the timing on that. I would say, on the semiconductor, we think the biggest demand driver right now is going to be 28-nanometer.

What was gas distribution as a percent of your revenues again? And will that have a bigger revenue opportunity as you focus on this 28-nanometer foundry business?

Yes, we're trying to dig.

Gas delivery, I think, was about 56%. I'm sorry, what was the second question?

Will that mix become higher as you target this 28-nanometer foundry-type bottleneck with customers targeting that segment?

I think temporarily, obviously, it comes a little bit higher as FEI rolls off; there's no gas delivery related to there. As some of these opportunities that Clarence has mentioned start to roll in, I think it comes back to a balance. Intuitive Surgical has been a great customer, as we've talked about over the years. Obviously everyone's seen their announcements and they continue to build their business, and I think that will be good and help us continue to build the non-gas delivery.

We are expert at the gas delivery. We are the world's largest provider and so we love that business, but we also like to see the balance come into the business as well, so we're going to try to build both of them.

I would say it will probably stay in the mid-50% range for quite a while.

On gross margins, was this low hanging fruit that helped get this sort of really nice pick up in gross margins? Or what should be the outlook for operating efficiencies and improvement in terms of driving gross margins from here?

No such thing as low hanging fruit when it comes to gross margin. It's a lot of hard work. Across -- broadly across the operations team and also supported by the finance team. You obviously look for the opportunities where you can have the most impact quickly and so we prioritized our initiatives, but all of this has been pretty high hanging fruit that we've really worked hard for and I'm very proud of the operational team and everybody involved in delivering these type of results.

I think there continues, as I mentioned, to be -- we've had some of the impact. I think we will continue to see some of that impact and I think we will continue to be able to expand the margin side of the business. We've worked very hard to try to get to the 15% to 18% margins we talked about and certainly that is our goal is to deliver on that 15% to 18% on a gross margin basis.

Congratulating you on the progress in gross margins and just wondering if there are more improvements here or would it be more mix related?

No, absolutely. This is largely related to improvements we have made. If you look back at 2010, our gross margin for the entire year was 13.3%. 2011 our gross margin for the entire year was 13%. We are now starting off 2012 and 14.2%, so a move of over 1.2% roughly in gross margin is not an easy thing to do. It is largely due to a lot of the operational things that we've changed, how we are handling direct labor, how we are dealing with inventory, how we are dealing with supply chain management. All these things have been significantly improved and we are just starting to see the results of those changes.

So we are confident, as Casey said, that we are well on our way to our targeted gross margins of greater than 15%. We would expect to see continued improvements, sustainable improvement. So we are very proud and very excited about what we've been able to accomplish in the operations group.

Yes, congratulations on that. And finally, Casey, what are the revenue mix? You normally provided revenue mix by end market, semiconductors, LED and the other areas, if you could give the revenue mix by end market?

Yes, we typically don't go end market by end market. We do a split between semiconductor and non-semiconductor. The semiconductor revenue was 85% for the quarter, but we typically don't go market by market.

(Operator Instructions) Colin Rusch, ThinkEquity.

Can you talk a little bit about the impact of these new product wins on your margin trajectory, and if you can use them to apply additional pressure on the supply chain?

In terms of applying additional pressure on the supply chain, I don't think it so much additional pressure. I think it is a focus on looking at potentially different suppliers. We have changed some suppliers, that is part of what we've been able to do. Obviously consolidation of more business with the suppliers helps. And so we think we've been very creative with suppliers.

I don't think that the new business opportunities are going to see a significantly different level of gross margin than our current products, although newer products do tend to generate a little bit higher gross margins. Over time they do tend to migrate to a more steady state level. But what I do think is that these gross margin improvements that we've seen are sustainable and we will still see even further improvements in gross margin associated with some of these activities that we've taken.

Can you talk just a little bit about material prices impacting your business and what you are hearing from your suppliers on that, just in terms of raw material and what they are trying to pass through and what they're giving up on?

Yes, I think one of the areas where we've been focusing, obviously, material is a big part of the cost in our business is the material in the supply chain. We've had an individual, Mark Bingaman, who's been involved in the Company for quite a while, but really has been able to focus on those areas just in the last six to nine months. And I think some of the benefit we are seeing is the hard work and the skill of the whole supply chain team led by Mark.

I think that as we move forward, we're always looking to qualifying new suppliers, looking at opportunities to try to improve upon our supply chain, but again, a lot of what we are also looking at is pure operational efficiency and coordination across sites and across continents. I think it is a combination of all of those things.

Jagadish Iyer, PJC.

Just wanted to understand on the clean win that you guys had alluded to, was that a competitive win? Can you talk about the competitive dynamics as well?

Yes, it is a competitive win. It was based on our performance. They are looking to shift from a smaller supplier to UCT based on our performance and history with other divisions within that company. We are very excited about this. Again, it represents a new area of opportunity for us. We haven't participated in clean tools significantly in the past and so this should be a very good win for us. And we earned it and we are very excited about it.

Congratulations. On the second one, I wanted to find out what is the difference in the opportunity -- you alluded to the OLED opportunity that you guys have recently got into action. Can you tell how much is the differential between your existing supply to LED versus OLED on a per-tool basis?

This is a very different tool than a typical MOCVD tool. Our revenue opportunity is fairly significant, but less than on an MOCVD tool. It would be maybe two-thirds the opportunity that we have on an individual MOCVD tool.

It is a different customer than the customers we are serving in the LED market. This is a start-up company in the OLED market, but they are very well funded by some very large players and they seem to have a very good product that we are getting an opportunity to participate in.

We are not doing just the gas delivery system on this OLED tool as we are on the MOCVD tools, so we actually have a little bit larger content as a percentage of the cost, the whole tool. But in terms of dollars, it is less than on the MOCVD tool.

Finally, Casey, on the second half when you guys talked about being flattish, just wanted to find out if there is upside on the second half if spending comes back from all the end customers, do you expect your gross margin to possibly hit 15% by the end of this year?

Yes, obviously our gross margins are dependent on the traditional things, volume, revenue and also the mix between low-cost regions and here. Right now they are also dependent on our operational improvements that we are talking about. Depending on how those three play together, I think that we're going to take the market that is dealt to us and optimize for it.

As far as the second half of the year, as I think was mentioned earlier, with some of the spending that TSMC has announced and other people, I think there's an opportunity that you might see some strength in the second half, 28-nanometer capacity that Clarence talked about earlier. On the one hand we are optimistic and continue to build the business. On the other hand, what we are really focused on is sticking to our own knitting and making sure that we are running the most efficient business globally and we are pretty pleased that we are starting to see some of the results from that.

Yes, we are not focused on the second half. Don't interpret anything that I said as guidance with regard to the second half. We really do not have that kind of visibility. What we do have is the ability to control our own destiny, and a large part of that is our gross margin. And we are definitely moving in the right direction on gross margin and expect to continue to do so throughout this year.

(Operator Instructions) Jay Deahna, individual investor.

The first question; embedded into your Q2 guidance, it looks like your gross margin is expected to be flattish or maybe up a tad; is that right or what?

Again, I think if you look at it, we are going to continue to execute. We don't guide to the margin number specifically on a forward quarter basis. I think that we're thinking that the numbers we put up there represent a pretty good solid story for Q2.

Again, Jay, what we've said is the gross margins have improved and we anticipate continued movement in a favorable direction.

Flat gross margin sequentially and down $5 million in revenue would be indicative of an improvement so I just wanted to make sure I was understanding what was worked into --

Absolutely. If we came in flat or even slightly down on a gross margin basis when you've got a mid-point that's roughly $8 million below the current quarter we just did, I think that hopefully continues to demonstrate our focus.

Casey, you guys said something about cash generation being positive in the next quarter, but cash down because you pay off your line of credit. How much is the line of credit and just put a little more detail on that whole spin?

What I'm saying is that we are going to generate cash this quarter, but unlike the past quarters where we've always exited with some of the revolver borrowed down, our anticipation is, exiting the quarter we won't have anything borrowed on our revolver and so what I was estimating was that, that would take our cash down about $10 million on a net basis.

Gross basis.

I'm sorry, gross basis.

So we anticipate to generate about $10 million this quarter. We have a line of credit of about $19 million. That's why we expect to be down about $10 million. We're going to generate cash of $10 million and then pay down $19 million, so our net cash will be up by about $10 million, but our gross cash will be down by about $10 million.

So you're going to wipe out the line of credit balance?

It will still be in place, but we won't have anything borrowed against it at the end of the quarter.

Okay. So what will your debt be after that? Will it be zero?

No, it is a very small number. We have a small term piece of our debt; it is about $4 million, I think.

Okay, okay. All right, and then the last question is, there has been a lot of discussion on this call about various new projects, existing markets, blah, blah, blah. FEI is falling off, obviously; LED, solar, FED are probably incredibly small right now. Semi, it looks like the industry is looking at ASML, et cetera. It feels like the industry is flattish in the second half of the year. However, 28-nanometer capacity is tight and you're talking about some share gain into Clean for 50-millimeter, sort of, on the R&D side, et cetera.

Outside shot at LED maybe starting to come back in 4Q but that remains to be seen. Intuitive Surgical is starting to ramp up into a 50% larger opportunity, maybe much later this year, into the early part of next year. If you pull all that together and obviously there is no specific guidance at this point for the second half, but are you thinking in the back of your minds that UCT as a company is something better than flat half over half, 2H over 1H this year, or are you assuming it is flattish and if it turns out to be better you'll be prepared to deliver some upside margin on it if it happens?

One of the points that I try to make is that in a slowdown, like we've experienced for the previous two quarters, not in Q1 but in Q3 and Q4 last year, that's when our customers have more time to explore different, new outsourcing strategies and different, new products. When things are relatively slow, that's when we have the biggest opportunity to generate new business that we see manifest itself two or three quarters or a year after a slowdown.

My point is that we've just come out of a slowdown. We're now experiencing some new business opportunities. We have several other new business opportunities in our pipeline. And so we would expect to start to see these all coming to fruition in the next few quarters. Then obviously, that gives us an opportunity.

Historically, what has happened to UCT is we continue to be very cyclical, but every time there's a down cycle we capture more new business so that at the next peak we end up growing to a much higher level and that's why we keep, overall, growing our business. This time our expectation is not only to grow our business as we see these new business wins materialize, but our expectation is to see this at a higher sustained gross margin. Frankly, we are very excited about two things. We're excited about the margin improvement and we are excited about the new business opportunities.

Basically it is the same pattern as the historical pattern, except you've got a one or two quarter pothole with the FEIC thing getting in the way?

Yes, that's very true. Like I said earlier, I think these new business wins are going to more than offset what we are experiencing with FEI.

All right, I get that; that's fine. If FEI was flat in 2Q versus 1Q, would the overall company be flat?

Flat to slightly up.

Okay. Now, looking at your LED business, there's been some positive chatter over the last week or so about some of the general lighting stuff with next-gen products from Cree; and I thought I heard some chatter, I don't know if it is from Edwin or whoever, about utilization rates ticking up a little bit in LED, although from very low levels. What are your LED customers telling you in terms of how much excess inventory they have in their manufacturing pipeline and how long they think that will take to clean out, and when they expect to see some sort of a turn in shipments that could impact what they buy from you?

Yes, again that's still very difficult to say, but our customers have been telling us Q3 or Q4 is when they expect the inventory to be consumed and start seeing new orders.

So if their excess inventory goes from excess to not excess, is that a situation where you could go from zero to $5 million or $6 million overnight, or is that situation where you would go to a couple million and then it would be just gauged by whatever their ramp is from there?

I really have a hard time projecting this. We haven't seen that with the LED business so we really don't know. It was just gangbusters up until the end of Q3, and then it literally shut off. Obviously, we would hope that it would turn on significantly when it turns on, but we have no history that says anything about that one way or the other.

All right and then last but not least, is there any light at all at the end of the tunnel on flat-panel or solar?

We aren't projecting anything of significance in Q2.

I'm talking looking out -- a couple of quarters out.

There is fundamentally nothing that is preventing that business from coming back at some point in time. Certainly on a flat-panel, we have lots of experience with that and that tends to go from boom to bust and back to boom again. We don't have visibility on timing on any of that. Our customers certainly haven't been discussing that with us at this point in time, so I really don't want to stick out and make projections, but it has a long history of being, and it's very, very cyclical.

From what I'm reading, Jay, and you are probably seeing the same stuff, LED, solar and the flat-panel, nobody's baking much in for this year and they are going to take it as upside. I think it is just too difficult for anybody to see, but I don't think anybody's baking much in there to your point from the very low levels where we are.

We are well-positioned on all those markets when they come back. We have several customers in each one of those markets, so when they do come back is when we will start doing really well again.

Congratulations on your operational and financial management improvements over the last three or four quarters. That's really what we need at the core and obviously you got your fingers into a lot of different revenue buckets when they are there, so that will take care of itself. Good work managing the Company.

(Operator Instructions) Jagadish Iyer, PJC.

On the 450-millimeter opportunity, can you give us an idea of what you foresee for this year and where you think it might potentially go for next year?

That is really a difficult one. I would expect to ship multiple prototype units in 2012. And probably some level of production starting towards the latter part of 2013. But that is just totally speculation on my part. I know we will ship multiple units this year, but they won't be production related units.

We have no further questions at this time.

I appreciated that. Well, thank you very much. We appreciate everybody's interest and support. We look forward to talking to you in the future. Thank you again. Thank you, operator.

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