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Q4 2023 Ultra Clean Holdings Inc Earnings Call

Participants

Rhonda Bennetto; SVP of IR; Ultra Clean Holdings Inc

Jim Scholhamer; CEO; Ultra Clean Holdings Inc

Sheri Savage; CFO; Ultra Clean Holdings Inc

Krish Sankar; Analyst; Cowen Inc

Christian Schwab; Analyst; Craig-Hallum Capital Group LLC

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Ultra Clean Technology Q4 and full year 2023 earnings call and webcast conference. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Wednesday, February for 31, 2024. I would now like to turn the conference over to Rhonda BNFL. Please go ahead.

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Rhonda Bennetto

Thank you, operator. Good afternoon, everyone, and thank you for joining us. With me today are Jim Sheldon, our 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. Then we'll open up the call for questions.
Today's call contains forward-looking statements that are subject to risks and uncertainties. For more information, please refer to the Risk Factors section in our SEC filings. All forward looking statements are based on estimates, projections and assumptions as of today, and we assume no obligation to update them after this call. And discussion of our financial results will be presented on a non-GAAP basis. The reconciliation of GAAP to non-GAAP can be found in today's press release posted on our website.
And with that, I'd like to turn the call over to Jim Jim.

Jim Scholhamer

Thank you, Rhonda, and welcome, everyone, to our Q4 2023 earnings call and webcast. I'll start by providing a brief overview of our Q4 results that Sheri will expand on in her commentary and also provide our thoughts on the current state of the industry and our plans to capitalize on the significant opportunity we see over the long term.
Fourth quarter, total revenue grew modestly as expected from the prior quarter. Visibility remains less than ideal as our products customers continued to shift mix and location to help expedite the normalization of inventory, our global footprint and ability to quickly flex to meet demand was an advantage in the quarter. Our services business stay relatively flat as customers maintain current output levels for 2023, our revenue and earnings largely reflected the overall decline across the broader semiconductor market. As we've done in previous downturns, we viewed last year as an opportunity to invest in several strategic actions that best position us to capitalize on the sizable growth opportunities that lie ahead, optimizing after operations and increasing capacity to support the next ramp or top priorities in 2023 in collaboration with our customers to align with their technology roadmaps. We enhanced our global footprint and capability with new state-of-the-art manufacturing facilities with added capacity, optimized workflow increased automation and higher levels of vertical integration. For example, in Chandler, Arizona, we've moved six buildings into a single new facility. And in the Czech Republic, we relocated three buildings into one these two new cutting edge scalable phase will meet the increasing demands of our growing customer base. We also expanded our footprint in Malaysia to support future demand from the region. This lower cost manufacturing center of excellence will have a positive impact on our overall profitability as volumes increase over time.
On the services side, we consolidated and modernize two sites into one in Phoenix and our new facility in Ireland and scaling production to meet the demands of our customers in Northwest Europe. With these value add enhancements now in place and more ongoing we have a global presence, capacity and efficiency to support $4 billion in revenue and grow profitably on a much larger scale heading into the next ramp and beyond.
And last, but not least, we expanded our suite of offerings with the acquisition of HIS. Innovations Group, further expanding our reach into the global SunFab market. Uct now offers integrated vacuum systems and ancillary equipment solution that integrates and sub fab ecosystem in a way that is value add and scalable as the demand for next-generation devices increases with the deployment of new technologies like 5G, AI and the Internet of Things, the need for advanced fabs capable of producing higher density, faster and more power-efficient chips will increase UCT's broad capabilities in design and manufacturing will enable us to continue to develop solutions that simplify installation, support and maintenance of these process tools critical to chip production with 2024 and in early days, current demand remains tepid as reflected in our Q1 guidance. However, our internal marketing research is aligned with broader industry sentiment and our customers and overall market dynamics are improving and should help drive a stronger exit to the year.
Looking to 2025 and beyond. The business case, supporting extensive investment for WFE is very compelling with global semiconductor sales widely predicted to reach a trillion by the end of the decade, requiring nearly twice the current capital spend. And we are continuously innovating and introducing new solutions, expanding our market presence and building momentum in that crucial technology turning points, especially in the litho space, where we are making great strides with a key customer. Some of these module types are valued at roughly five times higher than typical module, and we are ramping our deliveries over the next several quarters. Our solutions are increasingly gaining attention and will be a significant growth driver in the months and years. Ahead as many of the market inflections We are collaborating with our customers are still in the early stages of adoption.
In summary, UCT has emerged as a more valuable, stronger Company with greater profitability after each downturn.
During the past five quarters, we have been busy setting the stage to further expand our leadership position with a broader suite of offerings as a manufacturing partner of choice for our growing customer base well into the future.
And with that, I'll turn the call over to Sherry. Sherri?

Sheri Savage

Thanks, Jim, and good afternoon, everyone, and thanks for joining us in today's discussion, I'll be referring to non-GAAP numbers only. As Jim noted, demand for our products improved moderately in the fourth quarter with a dynamic environment as customers adjusted their mix and location to help rebalance inventory. Our service business remained steady as customers maintained utilization levels. Total revenue for the fourth quarter came in at $444.8 million compared to $435 million in the prior quarter. Revenue from products increased to $389.7 million compared to $380.9 million last quarter. Services revenue was $55.1 million compared to $54.1 million in Q3. For the full year. Total revenue was $1.7 billion compared to $2.4 billion in 2022, reflective of the broader industry downturns. Total gross margin for the fourth quarter increased to 16.7% from 15.5% last quarter. Product gross margin was 14.6% compared to 13.8% in the prior quarter. And services was 31.7% compared to 27.4% in Q3. Margins can be influenced by fluctuations in volume, mix and manufacturing region as well as material and transportation costs. So there will be variances quarter to quarter.
Total gross margin for 2023 was 16.6% compared to 20.2% in the prior year.
Operating expense for the quarter was $51.3 million compared to $48.6 million in Q3. As a percentage of revenue, operating expense was 11.5% compared to 11.2% in the prior quarter. For the year, operating expense as a percentage of revenue was 11.6% compared to 9.3% in the prior year. Total operating margin for the quarter improved to 5.2% compared to 4.4% in the third quarter. Margin from our products division was 4.6% compared to 4.5% in the prior quarter. And services margin was 9.5% compared to 3.7% in the prior quarter. The improvement in services margin was due to increased site and overhead efficiencies. For the full year, operating margin was 4.9% compared to 11% in the prior year due to lower overall revenue levels and decreased efficiencies typical during an industry trough based on 44.9 million shares outstanding and earnings per share for the quarter were $0.19 on net income of $8.5 million compared to $0.04 on net income of $2 million in the prior quarter. Current quarter earnings per share were above guidance from better factory efficiencies and discretionary spending management and favorable other income and expense due to foreign exchange benefits and government grants. For the full year, earnings per share were $0.56 on net income of $25.2 million compared to $3.98 on net income of $181.9 million in 2022. Our tax rate for the quarter was 16.4% compared to 37.3% last quarter when our tax rate was chewed up for year to date expense. For the full year, our tax rate was 18.9%, and we expect it to stay in the high 10s for 2024.
For Turning to the balance sheet, our cash and cash equivalents were $307 million compared to $342 million in Q3. We used cash on hand to acquire HIS. and make strategic capital investments to support our growth plan into the next ramp.
Cash flow from operations was $35.3 million compared to $36.2 million last quarter. For the full year, cash flow from operations was $135.9 million compared to $47.2 million in the prior year. During the quarter, we repurchased 239,000 shares at a total cost of $5.7 million, bringing total repurchase shares in 2023 to 1,009,000 shares at an aggregate cost of $29.4 million, leaving $108 million remaining on our three-year repurchase program. We are pleased with the execution of our plan to optimize our capital deployment strategies throughout 2023, despite a challenging environment, generating nearly $136 million in cash flow from operations enabled us to invest for future growth, pay down $39 million in debt and execute on our share repurchase plan and complete the strategic acquisition of ATS Innovations Group Turning to our guidance, we project total revenue for the first quarter of 2024 between 430 and $408 million. We expect EPS in the range of $0.03 to $0.23, reflecting higher expenses usually seen in the first quarter of every year.
And with that, I'd like to turn the call over to the operator for questions.

Question and Answer Session

Operator

Thank you.
Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one on your touchtone phone, you will hear a prompt that their hand has been raised. Should you wish to decline from the polling process, please press star followed by the number two. If you are using a speakerphone, please lift the handset before pressing end.
Your first question comes from the line of Krish Sankar from Cowen. Your line is now open.

Krish Sankar

Yes, thanks for taking my question, Jim, a question for you. I think in a couple of quarters ago, you said revenue levels are going to be bouncing around this range and looks like that is coming true. I'm just kind of curious, you know, Milton semicap companies have spoken about a second half inflection. You said more like exiting calendar '24 GaN bases and actually I want to make sure that I'm going to say that you think there's more inventory drawdown from your customers before you see a benefit for all three?

Jim Scholhamer

Yes, Chris, thanks for the question. And yes, I think there's several factors going on and we do expect some improvement in the second half on the on the chip side, but very incremental, I think the other factors where we're hoping for things to improve, you know, not just the exit, but starting in the second half is that the inventory our situation will be better as well as the demand is now coming from areas where our footprint is stronger. So 2023, there was a lot of demand in the Icap, which is mostly 200 millimeter, which is not an area of heavy of contract manufacturing. There's also a very strong comps little which were although we have a growing footprint, there is still in the single digits of our total total revenue as well as some other factors in our home kind of affecting where the investments are coming. So we're still seeing in this last quarter, we're still seeing the instability. I would say some areas that we thought we would be shipping from some of those orders got pushed around and areas where we didn't expect, you know, the orders, we got kind of drop in orders. So it's still a bit unstable. But the end result is the end result is, you know, we're incrementally seeing a little bit better results. So we're hopeful that we'll start to see it earlier in the second half as these factors come into play. But I think that the safest conservative assumption is that the chip demand won't really start taking off until near the end of the year.

Krish Sankar

Got it. Got it. And I think that's very helpful and makes a lot of sense when quickly on the EV side, you kind of mentioned some my understanding is you guys are more of the high pressure part of the muni versus no pressure. I'm just kind of curious, is there a possibility of you gained share in the low pressure side? Are you just mostly focused on high-pressure in a minute?

Jim Scholhamer

Yes, I think, um, yes, we are in the high pressure side and especially the light of the new products that are rolling out. And that's where we're starting to see the volumes ramp. We are in different smaller pockets I don't know if it's low pressure or not, but definitely on the cyber side, that laser laser areas and some of the older tools. So we have a kind of scattered footprint throughout the ASML tools that but the majority of what we're working on are the are the new tools, and that's where we're seeing the large modules start to start to roll out and increasing in numbers.

Krish Sankar

Got it.
And then just second quick housekeeping question for sharing and then you said OpEx would be all the expenses be higher in the March quarter, I think about gross margin in March relative to December?

Sheri Savage

Yes, I would say it's going to be fairly flat in other states, really depending upon where we ship out as things kind of shifted quite a bit during Q4. And I think, again, it just depends on if anything, shifts during Q1, but we still see it being in the same zone as we saw in Q4 for gross margin.

Krish Sankar

Thanks, Sheri. Thanks Jim.

Sheri Savage

Thank you.

Jim Scholhamer

Thank you, Chris.

Operator

Your next question comes from the line of Christian Schwab from Craig-Hallum Capital Growth.

Christian Schwab

Your line is now open, it goes AGM on it was revenue being down 27% year over year when WFE was obviously down much less than that year over year. So I understand the I caps commentary, but are mature node commentary. But you know, as this inventory cleans up, is there an opportunity for a material latter step up in the second half?
I guess it wasn't clear to me in the before question, or do you just expect still a modest recovery from where you are in Q1?

Jim Scholhamer

Yes, I think a ladder step you know, could happen, but I think our assumption is that it will be more of a gradual incremental improvement. We do not have a lot of visibility and what our customers have in inventory and even their demand is shifting around as we saw in the last quarter. And we know we know the inventory levels are high. You know, we don't know how much they still have about mean that we made in our competitors' names. So it's very difficult for us to say the inventory issue that we've had will be completely gone and there'll be a step function up. Obviously, it's improving.
But so we're just assuming kind of some incremental moves up. And at some point, the court will come off the bottom end and demand will more better reflect the WFE numbers. As you mentioned, the inventory was a headwind to deferred revenue was a headwind. The strong ASML. and high caps and MDP with metal deposition was really strong for Applied. So those are areas that are not very data-intensive, Tom. And so those were all headwinds we had in 2023 and as well as dep and etch and affecting dep and etch quite a bit as well. So a lot of those headwinds start to abate, but it's very difficult to predict the timing, but I think we're just assuming incremental improvement as we go along. And at some point, you know, there will be a step up as things clear out but it's very hard for us to predict that.

Christian Schwab

Okay. And then on the back side of this, you know, when the inventory correction is over and, you know, 25 and beyond, would you expect for you guys to own outgrow WFE like you did in the previous up-cycle? Or do you think that previous up-cycle grow above WFE or in some cases double digits was just an inventory build?

Jim Scholhamer

No.
I mean, we've outgrown on the upturn multiple times the in an upturn, the inventory disappears pretty quickly as well. And so it felt the inventory buildup only happens when the market differently, it just shuts down like it did in November of 2022. That's where the inventory piled up from everything in the float. So yes, we have a lot of factors. You know, we've been picking up share at multiple customers. We're doing we're doing very well, especially with these new modules or lift though that are starting to ship in larger quantities of Malaysia factory, we're putting some new wins into that factory. So we're still we're still growing share, and I expect we'll do what we've done the last since I've been here the last, there are three upturns that we'll outgrow again.

Christian Schwab

Fantastic. No other questions? Thank you.

Operator

Once again, as a reminder, if you wish to ask a question, please press bar followed by the number one. There are no further questions at this time. I will now hand the call over to Jim shall hammer Please continue.

Jim Scholhamer

Thank you all for attending this conference call and we look forward to speaking to you again in April.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.