Ultra Clean Holdings, Inc. (UCTT) Q2 2008 Earnings Report, Transcript and Summary

Good afternoon. My name is Rachael, and I will be your conference operator today. At this time I would like to welcome everyone to the Ultra Clean Technology’s 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 Mr. Jack Sexton, Chief Financial Officer as well as Clarence Granger, Chairman and Chief Executive Officer. I will now turn the call over to Mr. Sexton. Sir, you may begin your conference. Jack Sexton – Chief Financial Officer: Thank you, Rachael. Good afternoon and welcome to our second quarter financial results conference call. My name is Jack Sexton, Chief Financial Officer, of Ultra Clean Holdings, and with me today is our Chairman and Chief Executive Officer, Clarence Granger. A few moments ago we issued a press release reporting financial results for the second quarter 2008. The press release can be accessed from the Investor Relations section of Ultra Clean’s website at uct.com. In addition, we have arranged for a taped replay of this call, which may be accessed by phone. This replay will be available approximately one hour after the call’s conclusion and will be accessible for two weeks. The dial-in access number for this replay is 888-561-5097 for domestic callers and 706-679-7569 for international dialers. The pass code is 55-63-07-79 for both domestic and international callers. This call is also being webcast live with a web replay also available for 14 days from the Investor Relations section of our website at uct.com. Together with our recently issued press release, this conference call enables the company to comply with the SEC regulations for fair disclosure. Therefore, investors should accept the contents of this call as the company’s official guidance for the third quarter of fiscal 2008. 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, consolidation of activities in the US and expanded production at our China facilities. Investors are cautioned that forward-looking statements are neither promises nor guarantees but 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, including our most recent Form 10-K filed for the year ended December 28, 2007. The company disclaims any obligation to publicly update or revise any such forward-looking statements or to reflect events or circumstances that occur after this call. Now here are the second quarter results. Revenue for the second quarter of 2008 was $67.4 million, down 27% from the prior period revenue of $92.4 million and a decrease of 36% compared to revenue of $104.7 million in the same period a year ago. The sequential decrease was due to an industry wide cyclical reduction in demand affecting all semiconductor capital equipment customers. Second quarter revenue was at the low end of our guided range of $67 million to $74 million. Gross margin for the second quarter was 11.2%, down from 13.1% recorded in the first quarter and a decrease from 15.1% in the same period a year ago. The 190 basis points sequential reduction in gross margin is due to the impact of lower volume on factory utilization partially offset by cost reduction measures taken during the period. Operating expenses in the second quarter were $8.2 million, down approximately $900,000 compared to prior quarter. The sequential decrease is due to strict cost cutting measures including the impact of reductions in force carried out in February and April of this year as well as factory and office shut downs during slow periods. This was partially offset by approximately $400,000 in employee severance cost and $300,000 an increased cost associated with the move to our new Hayward facility. Redundant rent charges incurred during the period of approximately $200,000 bring a total reduction in force and facility consolidation charges to approximately $900,000 during the period. Interest and other net expense of $246,000 was down 29% sequentially due to lower interest charges on reduced debt levels. This debt was originally put in place in support of the Saegar acquisition. The severe reduction in demand during the period resulted in a pretax loss of $909,000 partially offset by a tax credit of $747,000. The 82% tax rate for the period increased from prior period due to the impact of our foreign operations and the near breakeven level of earnings for the period. We continue to model 29% effective tax rate on a go forward basis. Net loss for the second quarter was $162,000 decreasing from net income of $1.9 million in the first quarter and decreasing from net income of $5.1 million in the same period a year ago. Diluted loss per share for the second quarter 2008 was one penny on a GAAP basis. Within our guided range between a loss of $0.03 and income of $0.03. The one penny loss per share includes a $0.01 per share charge for amortization of intangible assets related to the Saegar acquisition and a $0.04 per share charge related to SFAS 123R. Turning to the balance sheet. During the second quarter cash increased $7.6 million sequentially to $32.6 million while third-party debt decreased $800,000 to $20.5 million. Taken together, cash net of or third-party debt increased $8.4 million during the period due to decreased working capital and positive EBITDA. On a related matter as announced in our earnings release management has recommended and the Board of Directors has approved a share repurchase plan of up to $10 million of the company’s common stock. The plan was expected to be initiated at the opening of the company’s trading window as established in our insider trading policy which is after the close of markets on Wednesday July 30th. Account receivables of $26.6 million decreased $21.1 million at 44% due to improved collections and lower revenue during the period. Day sales outstanding decreased to 11 days to 36 days at the end of the second quarter. Net inventory of $43.6 million decreased $4.8 million or 10%, due to decreased activity levels. Days inventory on hand, calculated on a forward-looking basis, increased 1 day to 78 days at the end of the second quarter. Accounts payable of $22.6 million decreased approximately $15.7 million, or 41%, during the period. Days payable outstanding decreased 10 days to 40 days. Now Clarence will discuss our operating highlights for the second quarter and provide guidance for the third quarter of 2008. Clarence? Clarence Granger – Chairman and Chief Executive Officer: Thanks Jack. The second quarter of 2008 was characterized by a 27% drop in revenue due to declining demand in the semiconductor capital equipment industry. Our revenue was down 39% from peak first quarter 2007 level. While this level of decline is painful, it is not unusual for the semiconductor capital equipment downturn. As in the past UCT will utilizes this as an opportunity to streamline our operations and to capture new outsourcing opportunities. So that when the industry does begin to recover, we can return to a faster growth rate than the overall industry. During the quarter we exercised our flexible business model to dramatically cut cost in all areas. Among other actions this included a reduction in our US base workforce of approximately 7% and 16 factory shutdown days during slow period. This was a significant factor in our ability to hit the lower end of our guidance range despite continuing declines in the industry demand. We also continued our transitional products to China and finally we continued to capture new outsourcing opportunities in the flat panel and solar subsystems market. With respect to commercial and operational highlights during the quarter, as was announced in our press release, we secured two significant new product orders from two existing key customers, both awards are for next generation products and both are in markets outside of semiconductor namely in solar and flat panel. We also increased our non semiconductor revenue by 18% sequentially to 22% of total sales in the second quarter. Additionally, we began ramping production in our second Shanghai facility and achieved profitability there in June. And finally we executed on our plan to consolidate facilities in the Silicon Valley. I will now provide further details on these accomplishments. During the quarter we secured new awards from two existing key customers. From one major customer we had been contracted to design and build a next generation gas abatement system for a solar tool. This is the next generation of the solar process module award announced in last quarter’s earnings release. We remain unscheduled with the delivery plan discussed in our last call and have already shipped our first qualification module. Deliveries of the most recent next generation award are expected to begin in 2009, winning the design work for future generation products is a critical part of our business model and further strengthens our customer relationships. The second new product award is from Photon Dynamics they have awarded UCT the production build of turnkey Gen-8 systems. Gen-8 is there most recent generation flat panel test system. Additionally during the quarter we shipped them our first production units of turnkey Gen-5 tool. This new opportunity demonstrates continued growth in our supply relationship with Photon Dynamics, which began at the end of 2007. Incremental revenue from these two awards is estimated to be $6 million to $8 million in 2009 and both will be manufactured at our new Shanghai facility. These wins reflect continued progress in our objective to grow faster in the semiconductor capital equipment industry in part by increasing the portion of our revenue derived from the adjacent markets of the solar, flat panel and medical device industries. During the quarter sales to these markets increased by 18% and now represent 22% of our total revenue up from 10% of total sales in the fourth quarter of 2007. Included in this increase was 6% revenue growth in our medical device products, we expect that revenue from all non semiconductor sources will continue to grow on an absolute basis and as a percentage of our revenue. In our China operations during the month of June, we generated a profit from our second Shanghai facility, only seven months after its opening in the November of 2007, this new 80,000 square foot facility houses are China based precision machining and large module manufacturing capability. And has beside for manufacturing all Photon dynamics subsystems and complete turnkey tools as well as the two solar gas abatement awards previously discussed. Growing our base in China is key to enhancing our competitive position and improving our profitability. In other areas we have moved our Menlo Park based production, engineering and SG&A staff into our new 100,000 square foot facility in Hayward California as planned. Our Menlo Park facilities were completely vacated by the middle of July. The assembly portion of our South San Francisco facilities will be transferred to the Hayward facility in August, completing our plan to centralize all Silicon Valley base, subsystem assembly operations and our head-quarters office under one roof. We are confident that we will over time realize significant savings through this consolidation. Transition costs associated with this move were $0.02 per share in Q2 and are projected to be another $0.02 per share for Q3. These costs are expected to cease by the beginning of Q4. Looking ahead to next quarter, we project a further decrease in semiconductor equipment industry demand, partially offset by continued growth in the flat panel, solar and medical device market. We expect revenue for the third quarter of 2008 to range between $60 million and $66 million and net loss per share to range between $0.03 and $0.10 on a GAAP basis. This EPS estimate includes an expected $0.01 per share charge for amortization of intangible, a $0.03 per share charge related to SFAS 123R. And a $0.02 per share charge for completing the final stages of relocation and centralization into our Hayward facility. To summarize the highlights for the second quarter, UCT achieved revenue and earnings per share within our guided range in another very challenging quarter for the industry. We received new product awards from two existing key customers and our pipeline of new products remains very strong. We transitioned the profitability in our new China facility and we streamlined our business in preparation for yet another quarter of declining semiconductor capital equipment industry demand. In closing, we remain optimistic about our market position, our flexible business model and our continued ability to grow faster than the industry. With that operator, we would now like to open the call for questions.

[Operator instructions]. Your first question comes from Edwin Mok of Needham & Company. Your line is open, sir.

Hi, thanks for taking my question. How are you doing Jack and Clarence?

Hi, Mok.

So, the first question is on, I just on the housekeeping’s question. How much of the revenue came from the China facility in the past quarter?

19% came up from our two China facilities which is flat with prior quarter as a percentage of revenue.

So, my understanding is that China is doing your non semi-gas panel as well as the foot on dynamics too. Why is that a flat sequentially in terms of percentage of revenue, that implies you actually have lower revenue in China, right?

Well, the start of that really is just the full time dynamics. We haven’t yet started the gas abatement products that we spoke about in real volume. So, we did have a little bit of an increase in our PDI activity and this is offset by a slight decline, a moderate, a very slight decline elsewhere. But otherwise, the China activity moved in concert with the rest of our activities. And from a general traction standpoint, we are, I mean, transitional analysis and work done is of course on setting up for the Gen-8 and the extension of our full time dynamics relationship and of course getting ready for these gas abatement tools we spoke about. So, there is a lot going on out there. It just happens that it’s basically flat as a percentage of revenue in this period.

I see. And you mentioned, I imagined that’s the reason and why you have a bigger tax credit then you had expected because you were--?

When the number gets so close to a breakeven point, as we are this quarter, you know, percentages become little much less meaningful than they do in normal instances. So, relatively small difference in the tax jurisdictions in which we operate in terms of the tax charge and credit can create a large percentage movement.

I see. And then, based on your guidance for the September quarter it seems to imply that you still have this kind of higher than normal tax rate, is that a correct assessment?

No, as I indicated in the text, we are guiding 29% effective tax rate. So, on a go forward basis, you can use 29%. It could very well be that because of the low levels of loss/profit during these period, while we’re very close to breakeven that the percentage is skewed but for modeling purposes I suggest you remain with 29%.

Right. And then, one more question regarding next quarter guidance. Based on your guidance and it seems to imply you expect a slightly lower gross margin just from fixed cost assumption, is that correct?

Correct. There is a bit of volume impact, the midpoint of our guidance range is $63 million and of course there is bit of fixed cost impact reducing our margin to about 10.5% at that midpoint.

Great. that’s all I have for now. Let me just -- let the other guys go on. Okay, thanks.

Thanks, Edwin.

Thank you. Your next question comes from Jenny Noone of JP Morgan. Your line is open.

Hi, guys good afternoon.

Hi, Jenny.

Just couple of quick question, Clarence you said that EPS guidance for next quarter is that a $0.03 to $0.10 loss or is that $0.03 to $0.10 profit?

No, $0.03 to $0.10 loss.

Okay, and then is it, is the $0.022 charge that’s included for the move, is that also include like any sort of additional employee severance cost, if you have any more coming next quarter?

No, there is no additional severance cost included in that number.

Okay, and then but you have some, I guess last quarter right?

Correct. I indicated in the text $400,000 approximately.

Okay. What is your EPS for the June quarter excluding the restructuring and the moving costs? Can you give us that?

Sure. If you take the midpoint of the guidance range, you’re right around $0.06 per share and if you take out $0.02 per share moving cost, you are down to $0.04. And, then the other cost you want, of course we got one penny per share for the amortization of intangibles and a 4 penny per share for SFAS 123R. Was there one more level you wanted to [multiple speakers]

Yeah, I was thinking for the June quarter, what you reported [multiple speakers]

Yeah, we are going to get profit.

Sorry, about that, you guys reported negative $0.01.

Right.

For the June quarter and then I’m just wondering if I pull out the employee severance cost of $400,000 and the moving cost of $300,000 and the duplicated rent of $200,000, where does that get you, well I guess, half rating number?

So you basically add back $0.03 to that $0.01 loss.

Okay, got you. Then did you guys give your percentage of gas panel versus non gas panel?

Yeah, the non gas has increased to 55% of total from 50% last quarter. And, again that’s primarily a function of the decline being mostly in the semiconductor side, all of our non semiconductor is non gas panel or most of our non semiconductor is non gas panel. So, since we had growth we had 18% growth in the non-semiconductor side most of which was non gas panel. So, that’s why the non gas panel increased to 55%.

Okay. That’s it, thank you.

Thanks, Jenny.

[Operator Instructions]. Our next question comes from Jay Deahna of JP Morgan. Your line is open.

Thanks very much. Hi, how are you doing? Every quarters you guys announced your mandates that’s being going on for quite some time and I’m just kind of curious, if you look back over the mandates that you have announced over the last six or seven quarters, have most the mandates ramped with your expectations in terms of dollar volume, have any not ramped at all but huge disappointments? Have any been better than expected? And then I’ve got a follow on from there.

Sure, Jay. Yeah, this is Clarence. Yeah, obviously we did, we have taken look at that and of the announcement that we made last year, we actually announced eight project wins last year of those seven of them have come to fruition and what we had expected with the range of those would be somewhere between $40 million to $60 million in incremental revenue. I would say most of these are new products for our customers and I would say of the projected revenue, we’ve probably seen one-fourth of what they had original projected. So, it was more in the order $15 million instead of the $40 million to $60 million that our customers were projecting at the time that we received the awards of actually started getting qualified. So, we are now qualified on seven of those eight projects that we announced last year, as they start to ramp, as we start coming out of this downturn; we should do very, very well. We also have announced five projects this year with revenues ranging in 2009 between $26 million and $38 million and obviously we are just at the very early stages of shipping some of those, but we are on schedule with every single one of those. So, between what we talked about and projected for 2008, when we talked about it in 2007 and 2009, we are talking somewhere between $70 million and $100 million of potential incremental revenue and we are on track with all of those except one project. So, when the industry comes back, we should be very well positioned to see significant growth.

So, the thesis has been as you scale into new projects and grow your non-semi business that you can deliver this consistent 15% premium midway for fab equipment industry, but it sounds like what you are saying is this your new mandates are depending upon your customers ramping new products and that’s a lot harder to get done, as a down turn which is why your down turn protection from new mandate is not as good as your upside juice [ph] if you will?

Yeah unfortunately as I said, you know, as you are rephrasing and paraphrasing these new mandates we want them, our customers are very pleased with us but the volumes particularly on the ones that have brand new products to the market place simply haven’t materialized so I guess to some extent what you are saying is true. There is a little bit less protection, but again we tend to have these whips off factor in the down turn we do tend to suffer a little more but in the upturn we also see a tremendous growth.

And based on your mandates, year-to-date in theory what I tend to hear is that in the down turn environment you have more time to get attention from the customer. They can focus on changing the way to do things as opposed to just grinding out the next unit, because there is high demand and that you would have a bigger opportunity to get new mandates to potentially ramp into the next upside goal. It sounds like what you were saying a few minutes ago that the dollar value of your mandates to-date actually shows a little deceleration versus last year’s. Is that correct or it is just a too early in the year to make that conclusion?

Yeah, I absolutely won’t say that Jay, we have what happens again is when things get really slow like this is when our customers put a lot of these new mandates. It starts the process on these new mandates, so I would expect us to be able to talk about some other new things in the future that are going to continue to scale that growth. So, I don’t see, we have quite a few projects in the pipeline that have not been awarded but that represent excellent growth opportunities.

Okay then the last question is little bit of a loaded question if I ask you this question I mean you point in the last six quarters the answer would have been wrong. But I will ask it again. What point in the not too distant future do you see some level of stabilization in your semiconductor equipment business, such to the point where you’re new mandates and your non-semi business can drive sequential growth. I mean, when some equipment gets a zero, I guess that can happen to me, we know that’s not going to happen that, I mean (inaudible) here. But seriously do you feel like you have any better feel for that now, do you at any point in the last two or three quarters or it is till too hard to call?

Well, I guess Jay, I mean, I thought we had a good understanding of the situation couple of quarters ago, and I thought we were seeing stabilization and obviously that turned out not to be the case. Obviously, the rate of decline that we are talking about in this coming quarter is less than the rate of decline that we’ve seen our customers do seem to beginning a little more optimistic about what’s going to happen in Q1 or at the end of the year in Q1, but obviously we are not giving guidance so far out. I certainly think that we are clearly getting to very, very low levels in semiconductor capital equipment. Certainly, on the order what we have seen before and in 2005, so I would hope we are getting very, very close to the bottom and once as we approach the bottom and obviously the other mandates have a huge impact.

And here is the absolute last question. The most recent weakness or down take that you have seen in your forecast from your semiconductor equipment, OEM customers have they been attributed to the recent weakness that has been publicized in expected NAND flash CapEx specifically from Samsung and Toshiba or has tat yet to filter down to you?

No that’s the most recent downturn that we have seen has been very recent I would say within the last few weeks and so the general information that you are talking about I would expect has been already included in that data.

Okay great thanks very much

You are welcome, Jay

Thank you. Your next question is a follow up question from Edwin Mok of Needham & Company. Your line is open sir.

Great, thanks. First one is on semi last quarter you guided that your non-semi would exceed 20% of your revenue for this year. Given that your growth this past quarter, you’re guiding to higher growth you care to give a more update on that estimates there?

As we indicated its 0.2% this quarter. So, you have got two dynamics you have got an absolute growth in that business which we think will continue to grow in this most recent period it grew by 18% and that the study growth in flat panel and medical device, the growth with respect to solar is really could be much larger than that if that is to be seen and the offsetting movement there is when the semiconductor it does recover and comes back the percentage of non-semi will come down as a result of that growth. So, we don’t want to get too tied up in what it is as a percentage, it will continue to grow an absolute in the very short term its going to continue of course to grow as a percentage of revenue. But, once that semiconductor ticks in and starts to really grow then it could well shrink as a percentage of revenue. But nevertheless, this 20% benchmark is something we want to, we don’t want to commit to every quarter but its something that we will eventually be comfortable hitting all the time and then growing beyond after that.

Edwin, to give you some idea on absolute dollars may be that’s a little easier. So at the end of the year in Q4 we were doing revenue of around $92 million so 20% of that would have been about $18 million, this last quarter if we did it over $14 million in revenue from these sources and so we’re still projecting over $18 million by Q4 somewhere in the $20 million range. I am comfortable that it will be continuing to grow and may be even more dramatically then that but that gives you an order magnitude dollar wise we are talking about something in $18 to $20 million.

That is certainly helpful. And then the second part on the semi side of business have you guys seen any incremental pricing pressure given how tough their market is right now, so your customer squeezing you a little bit, on that side?

No, we don’t see any more pricing pressure then we normally see. Our customers are ongoing negotiating with us and working on designs that will allow cost reduction and we do the same with our suppliers on a continuous basis so I don’t expect to see significantly greater cost pressure or margin pressure associated with target price reduction.

Okay. Great, that’s all I have thanks.

Thank you, Edwin.

Thank you. Our next question comes from Mr. Jay Deahna of JP Morgan. Your line is open, sir.

Hi Clarence two more questions. The first one is, have you built or are you building any gas panels or other such systems or 450 millimeter systems?

You said there were two. Well the answer to that question is no.

Okay. And then, the second one is we all know that Applied has had a very strong surge in orders for flat panel equipment from the January quarter through the July quarter and it’s poised to taper off. They’ve stated that publicly. So if you just look at that normal cyclical nature of flat panel display and the fact that there’s a nine month leave time, is obviously going to be a lump in the snake for your business for flat panel. Now, as we look into next year do you think that the growth in Morphis [ph] silicon solar will be consistent and steady enough to drive an overall growth in your combined flat panel and solar business or will the falloff in solar create a dip -- I mean in flat panel created to combine if you get a sense as to one percent?

Yeah. No, I understand exactly what you are saying. So, obviously we have factored in a decline in flat panel into our projections going forward for the balance of the year and with the awards that we’ve received, the incremental awards that we’ve now received in flat panel from Photon Dynamics we think that will help negate some of the downturn that we expect to see elsewhere in our flat panel business. But, on top of that we expect to see significant growth in the solar side not only with the gas delivery systems that we are currently providing but also with the gas abatement systems that we’ve been awarded some business on. So, though we expect the solar opportunity to significantly outgrow any decline that’s projected in the flat panel side.

I see and do you actually see a peak quarter for flat panel followed by some down quarters or as you kind of ramp down to gas power production for Applied and ramp up that Photon Dynamics system business, which is the larger ASP per unit, do you actually think that flat panel can grow quarterly for the next year, year and a half or do you actually see sort of a peak and then a period of decline before it comes up again?

I think it’s going to relatively flat now, based on the decline of the one and the increase of the other, I don’t think we will see a big drop of but I don’t think we will see it more than offsetting the decline in the gas panel side.

And when would that happen is that like a 4Q or 1Q thing?

Yeah, it’s more like 4Q/1Q.

So, 4Q would be the kind of the peak of the subsystems business and that would be at?

On the gas panel portion.

Yeah, okay. Great, thank you.

[Operator Instructions]. Our next question comes from Jesse Pichel of Piper Jaffray. Your line is open.

Hi, this is [Pallavi] for Jesse Pichel, I just wanted to know, what do your stock based compensation was during the quarter?

It was about $1 million.

$1 million. Okay, and also could you give us a sense of what that kind demand you’re experiencing specifically in relation to your (inaudible) from business, for your gas abatement tools?

Sure, this is Clarence. We’re at the very early stages of that so, what we said was we shipped our first prototype modules, this actually just recently, didn’t achieve revenue recognition in Q2 that’s the Q3 revenue recognition. So, we anticipate to see very good growth in that starting in like Q3 and early Q4.

Okay, thank you.

You are welcome.

[Operator Instructions]. Mr. Sexton, there are no further questions at this time. Do you have any additional or closing remarks.

Yes, I would like to thank everybody for joining the call. And once again encourage each of our investors and potential (Multiple Speakers) to join us on the road we are doing a bank sponsored [non-deal] roadshow, the first full week of August, we will be on the East Coast and look forward to seeing as many investors as we can. Again, thanks for the call, and we will speak to you next quarter.

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