Ultra Clean Holdings Inc (UCTT) 2018 Q1 法說會逐字稿

Good afternoon, everyone, and welcome to the Ultra Clean Technology's Q1 2018 Conference Call. (Operator Instructions) Please note, today's conference call is being recorded.

At this time, I'd like to turn the conference call over to Ms. Rhonda Bennetto, Investor Relations. You may begin.

Thank you, operator. Good afternoon, everyone, and thank you for joining us for our first quarter 2018 earnings conference call. With me are Jim Scholhamer, Chief Executive Officer; and Sheri Savage, Chief Financial Officer. Jim will begin with some prepared remarks about the business, and Sheri will follow with the financial review, after which we will open up the call for questions.

The press release we issued earlier this afternoon, along with the information about the webcast and how to access a replay of this call, can be found on the Investor Relations section of our website at www.uct.com.

Today's call may contain forward-looking statements, including the company's views regarding future financial performance, new capabilities or orders, 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 results listed here. Information concerning these risks and uncertainties is contained in our periodic filings with the SEC, including our most recent Form 10-Q and 10-K and in the press release relating to today's call. All forward-looking statements are based on management's estimates, projections and assumptions as of today, and UCT assumes no obligation to update them after today's call. Also, on today's call, we will be referring to non-GAAP adjusted financial measures, and reconciliations to GAAP measures can be found in today's press release.

And with that, I'd like to turn the call over to Jim. Jim?

Thank you, Rhonda, and good afternoon, everyone. Thank you for joining us today for our first quarter 2018 conference call and webcast. Extraordinary demand in the first quarter led to exceptional performance on the top and bottom line for UCT. Our ability to custom design, manufacture and deliver on time elevated our position in critical content on customers' platforms, allowing us to significantly outperform the markets we serve.

For the first quarter, total revenue grew to $315 million, a 26% sequential increase and up 54% year-over-year. Our ability to adapt production to accommodate the increase in demand led to non-GAAP earnings per share of $0.69, a 17% improvement over the last quarter and up 47% surge from the same period last year.

Our ability to execute across the board and our solid commitment to customer satisfaction is strengthening our relationships and leading to increased business.

UCT's growth this quarter was well above consensus and exceeded our expectations. We delivered on an unforeseen increase in time-sensitive demand from our customers late in the quarter and executed on the accelerated ramp of our new product line length.

Because we were able to execute and successfully meet customer demand, Q1 revenue growth nearly doubled our estimates. Taking into account the midpoint of Q2 guidance, this equates to a 23% increase for the first half of 2018 compared to the second half of 2017.

Our proven ability to provide engineering, critical fabrication, integration and testing capabilities on short notice while meeting stringent quality levels further strengthened our position as a preferred outsourcing partner in the semiconductor capital equipment industry. This is an area where we continue to hold a significant competitive advantage and see tremendous growth opportunity.

As semiconductor equipment OEMs increasingly rely on partners like UCT to fulfill ever-expanding capacity requirements, we are actively looking at ways to broaden our capabilities and offerings further on to our customers' platforms.

Our own internal research echoes that of the upbeat commentary we are hearing from industry peers and customers, indicating that demand for semiconductor wafer processing equipment will continue to grow at a healthy rate in 2018.

UCT's strong presence in the deposition and removal steps, a high-growth segment of the WFE market, should continue to drive UCT to new levels of performance over the long term.

The overall market remained strong from ongoing demand of a broad range of drivers, including emerging applications such as autonomous vehicles, the Internet of Things, high-performance computing, artificial intelligence and technology to support the data-sharing economy.

With our strong balance sheet, we are positioned to take advantage of the continued strength of the semiconductor market over the long term and are in prime position to continue to grow at an accelerated rate.

Moving on to our display business. We posted another solid quarter as overall spend remained high as compared to historical patterns. In 2017, the display market gained momentum as we witnessed the shift from liquid crystal displays to OLED displays in the mobile display market. Projections remain strong as panel makers are expected to continue to invest aggressively, although capital spending can vary from quarter to quarter.

While the majority of the investment will be directed towards the mobile display market, the premium TV market is expanding and gaining traction in the move towards GEN 10.5. We expect our display revenue to remain strong on average for the foreseeable future.

In summary, we are off to a great start to the year and continue to play an increasingly vital role in our customers' success. The combination of healthy and demand drivers supporting the WFE market, together with our pursuit of strategic investments to secure future profitable growth, strengthens our belief that 2018 will be another year of solid growth for UCT.

Now I would like to turn the call over to Sheri to review our financial results in more detail, and then open the call for questions. Sheri?

Thanks, Jim. In today's discussion, I will be referring to non-GAAP numbers only. The first quarter was a strong start to 2018 for UCT. During the quarter, the flexibility of our operations and the commitment of our entire team enabled us to quickly respond to our customers' increasing demand. By ensuring the quality completion of orders received while maintaining excellent operational efficiency, we deepened our relationships with our customers and vastly exceeded our expectations.

Total revenue for the first quarter reached a record high of $314.8 million, an increase of 26.5% from the last quarter. This far surpassed the high end of our guidance due to an influx of last-minute customer pull-ins at the end of the quarter.

In addition, our newly introduced product line wins ramped faster than expected. As a result, semiconductor revenue grew to $300 million, an increase of 27.5% quarter-over-quarter. As a percentage of total revenue, semiconductor revenue rose to 95.3% from 94.5% last quarter. Revenue from outside the U.S. reached a new high of $180.9 million compared to $139.4 million in the fourth quarter, as we continue to see the benefit of being strategically located close to our customers.

Non-semiconductor sales for the quarter were $14.9 million, an increase of $1.2 million over the prior quarter.

Gross margin for the quarter was 15.8%, within our targeted range, however, down from the 17.7% last quarter. Higher material costs required to meet the unanticipated late-quarter demand, together with the accelerated ramp of new products impacted gross margin. We expect gross margin to remain within our targeted range of 15% to 18% going forward.

Applying a disciplined approach towards operational efficiencies, we saw a considerable reduction in operating expenses as a percentage of revenue. While revenue grew 26.5% sequentially, OpEx as a percentage of revenue declined to 6.6% from 8.2% last quarter.

Reflecting the leverage of our model, operating margins for the first quarter came in at 9.2%, slightly above the midpoint of our targeted range compared with 9.5% in the prior quarter. Going forward, we remain comfortable that our operating margins will remain in our targeted range of 8% to 10%.

First quarter net income was $25.7 million or $0.69 per share, exceeding our expectations based on $37.5 million diluted shares outstanding. This compared to $20.3 million or $0.59 per share based on 34.5 million shares outstanding in the fourth quarter. The increase was the result of the secondary financing we closed in early February. The second quarter shares outstanding will be 39.3 million.

Tax rate for the quarter was 12.4% compared to 13.1% last quarter. We expect our tax rate to be in the range of 12% to 15% for 2018.

This quarter, we generated $5.1 million in cash from operating activities and continued to invest in working capital to support ongoing customer demand. This compares to $11.3 million in the fourth quarter. We incurred noncash charges of $2.6 million related to stock compensation, $1.3 million in depreciation and $1.1 million for amortization of intangibles.

Turning to the balance sheet. During the quarter, we received $94.3 million net proceeds from the secondary offering. As a result, net liquidity increased $91.6 million and cash grew $94.1 million to $162.4 million.

Outstanding debt increased sequentially by $2.5 million to $54.8 million relating to our subsidiary in the Czech Republic.

DSOs for the quarter decreased to 24 days from 33 in the prior quarter. At the end of the first quarter, inventory increased by $30 million to support the timing of customer shipments. Days payable outstanding returned to 57 days from 74 days at the end of last year.

That concludes our prepared remarks. Operator, I'd like to open the call for questions.

(Operator Instructions) Our first question today comes from Christian Schwab from Craig-Hallum Capital Group.

As we look for -- through the rest of the calendar year, one of your large customers kind of talked about roughly a 50-50 waiting or right around there plus or minus of revenue. So as you look at your business, do you kind of believe that the current run rate is going to be kind of the run rate throughout the year? Or do you see some drivers that could increase it in the back half of the year versus the front half?

Yes. Obviously, we see 2018 as a good year, very strong year. Nothing has changed in that. Yes, I think, the comments in the industry have been roughly flat. Obviously, 1 quarter -- quarter-to-quarter, there may be some fluctuations. But, I think, overall, we see the year to be pretty strong.

Okay. So the back half of the year could be plus or minus kind of it -- the same type of levels that Q1 and Q2 are? Is that fair? Make sure I understood that correctly?

Yes. I think that's the sentiment in the industry right now. And again, Q3 might differ from Q4, it will I'm sure, Q1 and Q2. So yes, we don't predict out to the second half. But I think the industry is pretty much aligned that the second half and the first half are relatively equal balanced. If you remember, and when we started 2017, there was a belief that the second half would be down quite a bit, and as the year went on, it flattened out. And I think we went into this year thinking it would be more of a up and a more balanced year and, I think, nothing has happened to change that view.

Fabulous. And then, my last question is, is there any update or follow update on potential acquisitions that you're looking at, do you have anything to add regarding your outlook there?

Yes, no specifics to add at this time. Inorganic growth is a very high priority, a top priority for us. I think given some of the recent stock market volatility and some of the declines in valuations, the targets have become even more intriguing. We see it as a very target-rich environment. We've added a lot of resources and increased our efforts quite a bit in this area. And we are focusing on the things that we always focus on, which is immediately accretive or nearly so, customer concentration, geographic location, supply chain consolidation and any specific capabilities. So we're very active and it's a great space right now for us.

Our next question comes from Karl Ackerman from Cowen.

I wanted to add a question on gross margins. While I understand there were some higher shipping costs in -- associated with the last-minute order ramp, could you bucket the declining gross margins between maybe mix and shipping costs? And I guess, initially, your June quarter guidance seems to imply flat margins from here despite the near record revenue. So I was hoping you could elaborate if 20% incremental margins is the right way to think about your longer-term gross margin profile? And I have a follow-up, please.

Okay. All right. Thanks, Karl. I'll take the first half, and then I'll let Sheri follow in with some of the more specifics. As we mentioned on the transcript, we've been gaining quite a bit of share from our customers, especially in the last half of '17 and early '18. And we saw those new products, for us, ramp much faster than expected. So we believe, obviously, the efficiencies of new product lines, they take some time to ring out. So we expect those to improve -- the efficiencies of those lines to improve going forward.

Yes. I mean, Karl, I think, we've talked about this in the past on other calls that the real key measure for us is probably more operating margin. I understand your question around gross margin. Just because of -- with the flexibility of our model, with our OpEx and being able to drop further profit down to op margin, that's kind of the key things that we look at internally. Obviously, this quarter we were able to deliver quite a bit of revenue at higher qualities to meet our customer demands and that really kind of just showed our operational flexibility and keeping our OpEx lower allowed us to drop more profitability. So we see us staying in the ranges of 8% to 10% from an op margin perspective. We really built guide as much on gross margin. But the op margin, we see us in the higher end of those ranges and within our ranges for the gross margin.

I appreciate that. As my follow-up, I think, one of the key attributes, both you and your primary competitor share, is the ability to grow above WFE spending on continued outsourcing opportunities from the front-end equipment providers, as I think there is a growing want to what was fewer and more capable suppliers. I would imagine most of the share gains from here should come from your manufactured components business. So could you just talk about how we should think about opportunities unfolding over the next 12 months to expand your non-semis business that is not OLED related?

Sorry, Karl, you're talking about the display business, in particular?

Non-display within your non-semis business, you've talked about some new program ramps. But just kind of want to talk about maybe the trajectory, both from new programs, but also from the ability to gain share from maybe some traditional EMF suppliers that you may not have previously?

Yes. We -- actually, we see the share gains within the semiconductor space is still -- there are a lot of opportunity there, both organically and inorganically. And there is a lot of -- lot more room to run in that space. I think that's one of the primary ways that we're going to continue, as we have been, to continue to outgrow the WFE market. We see that continuing over the long term. And again, display is relatively strong. Our strategy is to focus on semi and display. And we really are not focusing on the non-semi, non-display market. We have some business in that area, but it is not our main focus. So our growth is going to come from continued expansion into the semi space. If you think about the overall spend from the OEMs, we're still at less than 10% of the overall spend in that area. And we're one of the largest, if not, the largest suppliers in this space. So we see a lot of opportunity within that area.

Our next question comes from Patrick Ho from Stifel.

It's Brian Chin on for Patrick. First question, just to dwell back, Sheri, can you just quantify quickly the gross margin impact from that late quarter expedite demand, just curious like it was a 100 basis points or 150 basis points?

Yes. We don't -- we actually don't break it out that way. We look at it in aggregate. So in general, I would say that I'm not able to quantify that for you. But basically, I think, the key factor really is that the operating margin has been the key factor for us. We went into the quarter understanding what our forecast was and knew that our operating margin would be at the higher level. So gross margin can fluctuate quarter-over-quarter within that 15% to 18%. And we feel like we're going a -- we're in a good area based on the revenue that we delivered.

Okay. In terms of the future inorganic opportunities that you're looking at. Obviously, you're looking to expand your TAM in this marriage, that you don't have core competencies and what are some of the opportunities that you're looking at, are there kind of some targets where you can potentially expand your margins? (inaudible) you have the gross margin line in terms of the value you're bringing to customers or could bring? Or in terms of scale synergies in terms of op margins? Did you see legitimate opportunities there in terms of your M&A activity?

Yes. Absolutely. There is a wide spectrum of company types in that range. There is companies which are at significantly higher gross margin and operating margins. They tend to be in more niche areas, niche capabilities. So they have lower revenue potential. The majority of the revenue in our space sits around where we perform. So I would say on average, there are opportunities across the spectrum, but the large -- the things that move the needle on revenue are in a similar margin range where we sit. But yes, we're looking at targets across the spectrum, both in the specialized components area and in -- and the larger revenue areas as well.

Okay. That's helpful. Maybe one last question. Just curious from a sensitivity standpoint. And again, I know that there's maybe been some talk about a little bit of first half bias in terms of the larger equipment makers, in terms of their shipment distribution in 2018. But this is a given quarter, your revenues were declined 10% sequentially. Just curious how quickly you could lower -- how fast you could lower OpEx in that kind of revenue sensitivity environment?

Yes, I mean, from an OpEx perspective, we're probably where we need to be with the levels of revenue that we're at. It's more probably -- the key factor on our P&L really is material and labor. So that's the 2 key factors -- if for some reason revenue were to decline, that's the 2 factors that would come down the quickest at this point.

(Operator Instructions) Our next question comes from Edwin Mok from Needham & Company.

So first, I guess, I'm trying to understand maybe the mix -- how mix has a factor on gross margin. I know you talked more about (inaudible) being a headwind for margin in the first quarter. But just curious on the first quarter, did mix play a factor? And I think, previously, we've seen that when you ramp some of these newer wins it has -- it put some drag on your gross margin. Was that also a factor on your gross margin in the first quarter? And I've 2 follow-ups.

Yes. There's a lot of -- there are multiple factors on -- in the gross margin area. Their product mix is definitely a factor. This quarter, we saw a lot of quick turnaround at the end of the quarter. It required quite a bit of flexibility from UCT. We're very proud that we're able to deliver for our customers on a very short turnaround. There's a spectrum on the product mix as well, just like on the targets in the M&A. And it's kind of Gaussian distribution, if you would. And the newer products -- the flip side of winning newer products is, obviously, they don't start out as efficient in the very beginning. We ring the efficiencies out as we get more time on them. So they tend to start out at the lower end of the bell curve, and then as we get experience and ring costs out, they move up enough to the right. So there is -- depending on the region that we ship from, depending on what type of product we're making, there are a lot of variables in that. But really it's a reflection of our success on share gain while we're seeing some of the mix temporarily and being very heavy in the new product line wins. They ramped much quicker than planned, which is a great thing for us.

Maybe (inaudible) normalized cases once those newer tailwind has ramped, right? Do you think that they can get to your 15% to 18% range? Or they tend to be at the lower end of that range?

You're talking about the new products?

Yes. As you've mentioned and you've given a number that demonstrated you've ramped a number of new products, I'm just curious there's like some of the new wins and the type of product that you're selling. Are they generally potentially coming at a lower end of the range? Or they're generally coming at the higher end of range or typical with the range.

Yes. Generally, they come in at the lower end of the range, but it obviously depends on what it is. But it's just -- they just naturally start out as we're learning how to make the products, and we're working down the labor hours required to make it and the materials costs. They tend to be below where they were -- they start out lower than where they end up. And this is -- historically, this is what UCT has done for decades, has worked the cost out of products as they -- as we bring them on board. So it's a great thing that we're bringing on so many new products. We've got a lot of opportunity to continue to work costs out, which UCT is an expert at.

Okay. I have a question on inventory. Internally, it seems like it is pretty high, part of it, I guess, that helps you because it allows you to have product to ramp for your customer. Sheri, so we could kind of think about kind of long run, how do you think about inventories, is it kind of at the right level now in terms of the level inventory or inventory days of the business? Or do you see room for that to improve?

Yes, Edwin, good question. I mean, we obviously keep a very close eye on working capital in general. And I think the key thing is that we need a certain level of inventory to be able to meet our customers' demand very quickly. So they go up quarter over quarter to be able to meet that demand that they have. Because obviously, there is timing as to when certain shipments go out. So I think, we obviously strive to continue to get more and more efficient from an inventory perspective as well and not something that we're concentrating on to make sure that we're spending the right cash on inventory. So I see that it's something that we continue to keep an eye on. But for now, that -- this level is what we need to meet our customers' demand.

Great. Helpful color there. Last question I have on current M&A pipeline. So one of your primary competitor, they did another transaction that seems like a way for them to get into international market. How do you think your footprint is internationally to some of the customer outside of U.S.? And is that kind of the right strategy? I know you guys have quite a bit of international footprint in Mexico and Shanghai already, right? Is it a right strategy? Or do you feel that kind of maybe target more (inaudible) capability or products makes more sense for you in terms of M&A?

Yes, we are very well set up with our geographic locations across the Asia. We have several sites in Asia, the U.S. and Europe. But it is a factor, customer diversification and product diversification. These are other areas that we look at. So as I mentioned, it's really a very fragmented supply chain. And there are targets and good opportunities in almost all areas where you look. And so it is one of the considerations of improving. Geographic footprint is one of the many. But obviously, being -- we buy healthy businesses. We don't buy broken businesses and we buy healthy businesses, integrate them in with our strong base business and make 1 plus 1 equals 3. That's the idea. And we've been very successful over the many years in our M&A strategy, and we look at all those factors. But we are -- to your point, we are -- geographically, we cover the world pretty well already.

(Operator Instructions) And ladies and gentlemen, at this time, I'm showing no additional questions. I'd like to close today's question-and-answer session and turn the conference call back over to Mr. Scholhamer for any closing remarks.

Well, thank you for joining us today. We appreciate your support and we look forward to updating you on our second quarter.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.