Good afternoon, and welcome to the Ultra Clean Technology Q1 2020 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded.I would now like to turn the conference over to Rhonda, Rhonda Bennetto with Investor Relations. Please go ahead.

Thank you, Ian. Good afternoon, everyone, and thank you for joining us. We hope that you and your families are safe and healthy. With me today 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 a 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 disclosure 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. Discussion of our financial results will be presented on a non-GAAP basis. A 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?

Thank you, Rhonda, and good afternoon, everyone. Thank you for joining us. Today, I will be speaking mostly about the global COVID-19 pandemic, UCT's response to date, our current situation and our near-term outlook. Then I'll turn the call over to Sheri for a financial review before opening up the call for questions.As an essential global company tackling a worldwide pandemic, UCT has done an extraordinary job proactively managing through these unprecedented times. We recognized the potential impact in Asia early and initiated global site readiness in other regions where our facilities are located before the virus spread. This enabled us to maximize capacity at our factories and manage our suppliers with minimal disruption to meet customer demand. I'd say this not in a boastful way and certainly without any complacency, but more to explain what actions we have taken and share some insights on how we delivered our highest revenue quarter-to-date with improved profitability and strong earnings.The first and most important way we measure our success is by the health and safety of our 4,700 employees around the world. We conducted an internal survey earlier this month, and among other positive responses, we found that the vast majority of our employees said they felt safe or very safe while working at our facilities. We are sincerely grateful for their hard work and dedication and their relentless drive to deliver the best possible results for our customers, suppliers, company, community and shareholders.An equally important measure of our success is customer satisfaction, which is only possible with a committed workforce. Every significant product and service customer has provided feedback citing the excellent job we have done with respect to transparency, on-time delivery, flexibility and the thoroughness of our business continuity planning. In addition to meeting the majority of the product orders…

Thanks, Jim, and good afternoon, everyone. Thanks for joining us. In today's discussion, I will be referring to non-GAAP numbers only. We continue to see strong demand from ongoing industry momentum in the first quarter, resulting in record revenue for UCT despite some facility disruptions due to COVID-19. Operational efficiencies, together with higher volumes resulted in the improved profitability and increased earnings quarter-over-quarter.Total revenue for the quarter was $322.9 million, up 12% from the prior quarter. Our products division grew 12.7% to $259.4 million on increased demand from our largest customers. Our services group contributed $61.5 million, up 9.4% as wafer fab utilization returned to more normalized run rates. Gross margin 20.9%, up from 20.3% last quarter. Higher volume brought our products gross margin to 17.4% from 16.4% last quarter. Service gross margin was 35.9% compared to 36.5% last quarter. Margins can be influenced by customer concentration, geography, product mix, volume and expensed related to COVID-19, so you should expect to see variances quarter-to-quarter.Operating expenses were $35.4 million, up from $31.4 million in the prior quarter, primarily due to the increases typically seen in the first quarter, such as audit fees and employee-related taxes. As a percentage of revenue, operating expenses were 11%, flat with the prior quarter despite the 12% increase in revenue. Total operating margin for the quarter improved to 9.9%. Margin from services was 11.9% compared to 15% last quarter due to higher audit fees. We anticipate that service operating margin returning to a more normalized range in the second quarter. Products margin improved to 9.5% versus 8% in the prior quarter due to increased volumes. Based on 40.7 million shares outstanding, earnings per share for the quarter improved from $0.40 to $ 0.52, a net income of $21 million compared to $16 million in the prior quarter. Our tax rate for the quarter was 18.7% compared to 20.8% last quarter. We expect our tax rate for 2020 to be the high teens.Turning to the balance sheet. During the March quarter, we increased our cash and cash equivalents from $162.5 million to $208.1 million. Cash from operations was $15.7 million, and we drew down $40 million on our revolving credit facility. While we have a very healthy balance sheet and flexibility in our cost structure, we feel it's prudent to preserve cash during this precedented time.While demand remained strong in the near term, we are risk adjusting our guidance to account for the numerous uncertainties surrounding the COVID-19 pandemic, including unexpected changes in demand and supply chain interruptions. We anticipate revenue for the second quarter to be between $290 million and $330 million, and EPS in the range of $0.40 to $0.56 per share.And with that, I'd like to turn the call over to the operator for questions.

[Operator Instructions]. And the first question today will come from Quinn Bolton with Needham & Company.

This is Charles on behalf of Quinn. Congratulations on the strong results. I have 2 questions for now. The first question is about SPS. Again, congratulations on the 13% sequential growth. And I just wonder, I think you mentioned that some of your OEM customers shifted some volumes from your competitors to you. I wonder whether natural demand increased q-over-q. And some of the advanced purchase, maybe of your OEM customers, to secure safety stocks could also play a role, if yes. And how should I think about which 1 of these 3 factors are really playing the biggest contribution here? And I have a follow-up on SSB.

Yes, Charles. Yes, the majority of the increase was due to natural demand. We don't believe it was advanced purchases because we saw these bookings before a lot of the crisis hit. Basically, we were able to mitigate a lot of the shortfalls that we had seen as issues when we went into the quarter. So the majority of the increase was kind of already expected from the ramp that we came out of in Q4.

Got it, got it, got it. So maybe let me move to the question on service. I think you pointed out that, especially memory, some of the fab utilization was stopped sequentially. I wonder -- I remember your service business has a large contribution, actually, also from the OEM demand. When they ship out new tools, they go through your service. And how do I think about the contribution of these two factors, either the OEMs and the fabs? If you can give more color, that would be great.

Yes, sure. The bigger chunk of the increase in the services group was coming from the fabs. Obviously, we saw continued growth with Intel, like we've seen over the past several quarters. And then we saw the memory fabs, particularly Samsung, really begin -- continue their recovery that we started to see in Q4 and come up much stronger in Q1. And the OEM business is up, but that was probably a third level factor.

Okay, okay. So regarding the fab utilization, what do you see if we go into the next quarter? We definitely understand, in Q1, there are demand like data center and due to, I mean, global work from home kind of initiative. What's the -- what do you see going into Q2? How is the fab utilization trending? Is it trending up? Or you are -- do you see any headwinds in that?

Yes. It'd be difficult to call it up. I mean, they've recovered to a significantly higher level, so I think they'll continue to be. We expect and included in our guidance, this data for the second quarter, so continue to be at the high level that it is returning to. But it's very difficult to call whether it's going to continue to go up or -- from there, but we see it continuing strong through the second quarter right now.

The next question will come from Patrick Ho with Stifel.

Glad to hear everyone's well, and congrats on a really nice quarter. Jim, maybe first off, given a lot of the disruptions and a lot of the constraints that are still going on today, given your outlook, are you still facing any, I guess, supply chain constraints or customer timing because some of your larger customers are still constrained by their ability maybe to get parts or getting tools delivered. How are you balancing the act on your end, given that -- operationally, you've done really well. How are you balancing it with your customer, I guess, issues on their end?

Yes. So in our -- Patrick, in our forecast for the second quarter, we've seen a lot of that reflow based on their constraints already kind of come through into our bottoms-up forecast. So that -- those issues are contained in the -- our numbers that we put out for Q2. So I think that's kind of where we see it right now. We're hoping it will improve. If it is, we're ready, and we're also doing what we can to -- where there's a shortfall that where we can jump in where we have capability and capacity. We're certainly coming in to try to alleviate some of those issues as well. But we've already built that into the second quarter forecast. Now, of course, we don't know what tomorrow brings. But there have been new issues that come up on a week-to-week basis, and most of them, we've been able to mitigate.

Great, that's helpful. And maybe as a follow-up question. In terms of the food chain, you're getting inventory building across from the OEM consumers all the way at the top, to the chip makers, to the equipment companies. From your business continuity plans, given how well you operated during the quarter, how are you, I guess, managing inventory and maybe building some inventory on your end in case there's any future disruption? Longer lead times, how are you managing that?

Yes. We're definitely still keeping an eye on inventory. As we just add another company, one foot on the gas and one foot on the brake. We definitely keep trying to manage our inventory to keep our liquid assets liquid. But obviously, there's a handful of certain components which are constrained. And obviously, where we can get an additional buffer, it's in those constraints. We work to do that while balancing to make sure that we don't tie up too much cash. We did a very good job, I think, on managing our inventory. Our turns actually increased in the first quarter. Inventory went up but not as much as revenue.

Great. And final question for me. On your services side of the business, obviously, that's driven by utilization rates and we have seen wafer starts across the board pick up, heading into the June quarter. Are there any other types of new offerings or services that you can give your customers on that end to keep revenues at a more, I guess, elevated level given a lot of the uncertainties there are right now going into the second half regarding demand?

On the short term, that revenue is very difficult to replace by being -- flexibility by offering different services. Obviously, we're always working on new opportunities and penetrating in other areas, but those tend to be longer term. So we still, in that business, we still basically follow wafer starts and to a smaller degree, new equipment shipments. But yes, that's not something we can easily flex and have a different service offered in the immediate future to fill in any gaps. But we're always working on expanding our presence and growing that, but those are more longer term programs.

The next question will come from Karl Ackerman with Cowen.

Jim and Sheri. Congrats on the results. I mean, clearly, first half results have been healthy, I think largely driven by foundry and logic spend. Memory investments look to be more weighted toward DRAM in the first half of the year. I'd love to hear your view on how you see the mix of end market demand in the second half of the year, particularly given, I think, your services business is a bit more lower toward memory. So your thoughts there on just kind of end market dynamics would be helpful.

I wish I had a view to help you with, Karl. I think as you see everyone report, including those companies which are even closer to it than we are, the second half is really unknown. There are winners and losers in the chip area, as you know, depending on whether you're in the cloud or telecoms or computers versus automotive or smartphones, right? There's a whole mixed bag going on. And in the second half, we really have no additional insight beyond what you're reading, as Samsung reported this morning, and others.

Sure. Got it. No, that's fair. Maybe a different tact. Your ability to accommodate last-minute customer demand has certainly been very beneficial for you in the first half of the year. Oftentimes, in recessionary periods, larger and more nimble companies tend to outperform peers as market dynamics accelerate. I'm curious how you think about your design win funnel for the second half of the year on an organic basis. And given your larger liquidity position, how are you thinking about inorganic activities in the current environment towards less financially healthy localized suppliers?

Yes. We have a lot of organic design win opportunities with our current customers and also with the kind of new up and coming customers as well. And I think we haven't seen any change to those programs. If anything, the programs were -- which are continuing, not at the customer sites, but are continuing within the OEM's walls are -- there's a lot of -- there's a significant ability for them to really work to focus on those right now as they're restricted in the field a little bit. So we are -- we continue to feel really healthy about our pipeline on those new wins, and we haven't seen that really get impacted by the virus pandemic to date. As far as inorganic, we're always very opportunistic, but also, we're very conservative. And so as you saw, we drew down some revolver. So without knowing what the macro events might be towards the end of the year, we're more leaning towards being very conservative as far as keeping cash on our balance sheet and making sure we're ready for whatever the fallout, the economic fallout might be. But having said that, we always keep the process going. We're always looking at opportunities. We're always looking to see what makes sense, and we'll continue that process, but definitely with a conservative eye towards being ready for any potential macro events, which definitely have a higher chance of coming than normal.

And the next question will come from Christian Schwab with Craig-Hallum Capital Group.

Congratulations, guys, on a fabulous quarter. I just wanted to follow-up on the second half kind of outlook and commentary, potentially, if we can. I know it's the largest memory as you said despite some unknowns regarding handset demand. Ultimately, they still think memory should be relatively strong again in the second half. So if we get through this on the back side without a relapse in the COVID-19, can you give us a range of potential outcomes about how strong the second half could be for you?

Yes, that would be difficult. Obviously, if without -- if no impact or minimal impact macroeconomically, with the delays to, like the Apple phone and others, we would have expected the ramp that started in Q4 of '19 to continue, that we would have continued to see revenue increases on the order of what we saw this quarter as we go forward quarter-to-quarter. So let's think of that as kind of how naturally things could have evolved without impact from the virus.On the bottom end, I really, really can't say. Obviously, we've seen push-outs of the smart -- Apple's phone and -- but we do see kind of a buffer that we see the quality investments in the server and other areas that are still continuing and need to continue. So we're seeing, like I said on another question, we're seeing some winners kind of buffer the lower end projection. So I really don't have a great insight. I don't think anyone does on the second half of the year. But if you're optimistic, you could continue to imagine that things would get back on track pretty quickly, and you would have -- I think you would have continued to see growth rates like what we've seen this quarter.

The next question is from David Duley with Steelhead.

Yes. I think you mentioned that your global manufacturing footprint allowed you to meet demand from customers that -- potentially, it sounded like that was market share gains. Could you help us understand what geographic regions helped you achieve that? And what areas were you referring to that you might have taken business from other guys that weren't able to fulfill?

Yes. So on the first part, the pandemic, as everyone knows, hit China first. So we were -- we have a footprint in China where a lot of our peers don't have a footprint or have a very minimal footprint there were -- that tended to be more in Southeast Asia, and specifically Malaysia. So we initially got kind of it early, but we're able to recover pretty quickly. And so by the time the pandemic hit Malaysia, that's a footprint where a lot of our peers, our competitors were based, and we have some suppliers in Malaysia, though we didn't have factories like many of them did. So when they hit China, we're able to shift a lot of things at Singapore, and we have a small site in the Philippines that we were able to flex. And then when it hit Malaysia, we were able to move things kind of back into China and to Singapore, where our peers were struggling in that area.So a lot of those were major modules as well as components like weldments and other areas, which -- where you have a lot of capability to have a quick turnaround for demand. The weldments are smaller components and we're able to move in faster. So it's kind of a mixture of smaller components that we could flex and as well as some major modules. So having the site in Singapore and China. And what -- the other thing that China did for us is it gave us kind of an early playbook to run off of. So that as it started to move around the globe, we were kind of ahead of the playbook on how to move where others that weren't in China didn't have that, really, that head start as much as we did, that experience on how to maneuver around the product and the supply chain and activate that. So there's this -- it was kind of a hot potato between our different regions and a little bit of luck by not having that heavy presence in Malaysia, like some of our peers.

Okay. That's great. Now as far as the OEM business goes, I think you addressed it a little bit, but if you could just talk a little bit more in detail. In times of difficult outlooks, they might build inventory. And how do you measure that? Or do you know if your OEM customers have built inventory because they're worried about COVID supply chain issues? Or if you could just give a little bit more color on this topic, that would be great.

Yes. As we were in a ramp, there really hasn't been much opportunity for our customers to build much inventory. It's one point. The second point is what we make is more almost customized rather than standard components like a power supply or a mass flow controller, which are kind of more shelf-type items. So our area where we operate in as a contract manufacturer, that's last of a inventoriable item, if you would. So I really don't believe there's any significant inventory between us and the OEMs. Their shifts and schedule are when they could -- when they needed the tool based on their ability to get everything. They needed to complete the tool, but not an exercise where they did really the inventory items between us and themselves. So that's really not something that we consider as much of a factor.

Okay, great. And just a couple of other questions for me. As far as -- I know you shipped into the OEMs and they ship into the customers. But if you could just comment about what you might be seeing in China since that economy seems to be coming out of the COVID situation since they went into it first. Are you seeing a ramp-up in the domestic Chinese guys? And I guess, the final question would be is, I know it's difficult to gauge what the overall wafer fab equipment business revenue might be this year. But what is your range of planning at this point for that?

Yes. So on the first question, in China, we're seeing strength continuing. One, obviously, they're past most wave -- most of the wave. So we see them continue strong. And two is, I think there's also they have China fabs that concerns around some of the new export controls that are being talked about in Washington. So we continue to see the China fabs continuing to invest as well as they're trying -- they're making both technology and capacity investments for a lot of the other fabs that are more related around technology investments, especially in the memory space. So we're still seeing strength in China, and we expect that to continue, especially while the pause is going on. The range on WFEs, what we're seeing from different pundits is basically, at best, it's flat and the worst -- not at the worst, but a lot of the estimates are single-digit decline. And for the sake of planning, obviously, we do -- for the next quarter guidance, we're not looking at WFE numbers, we're looking at real orders and the situations around those. But as part of the range of where WFE could end up, like I said, a single-digit decline off of '19 to flat. And then we don't really plan around any other scenarios that are more extreme than that, but of course, we have plans in place for when those do happen. So that -- I think that those are reasonable expectations, especially since the WFE has been somewhat, not immune, but less affected through at least the first half of the year under the belt. So we'll have to see what happens in the second half.

And the next question will be from Dick Ryan with Doherty.

So Jim, one of your longer-term goals has been to increase contributions from other key customers. Has the current environment shifted any of that potential sorts of market share gains, your ways, or is it still too early to tell on that?

No. To date, especially our effort to grow, as you're right, our effort to grow, like 1/3 customer at 10% reporting, those -- that continues to go very well. We've done some -- we've had a series of very nice wins with one of the OEMs who's not in our top 2. So that, we continue to see a lot of success in that. And a lot of those are projects and products that are coming out in next year, and those tend to continue regardless of what's happening in the moment. Those are the new product lineups. So we continue to see great successes in winning some programs and projects in that space. And so to date, we haven't seen any impact on our road map to -- as we expand our share.

Okay. And I heard the guidance for Q2, but did you -- I may have missed it, but did you talk about what your expectations are for each of the segments, the product and services for Q2, kind of the mix?

No. We didn't break out by product line. But I think, as you can see, the revenue is nearly flat than we're projecting, so you can expect a similar mix.

The next question is a follow-up from Quinn Bolton with Needham & Company.

Regarding the -- some of the OEM shifting some volumes to your way in the first quarter, can you let us know whether those market share shifted? Are they permanent? Or do you think they will go back to the original supplier? I just wanted to understand how -- we understand there's ebbs and flows in terms of share dynamics. But what's already shipped to go away, would they go away or they will stay with you?

Yes, sure. Yes, obviously, some of them are clearly temporary shifts just around the situation, but I think it'd be reasonable to expect that some of the shifts would continue based on continued uncertainty around supply chain and our strong performance that we've had to date, that we could see a portion of those continue. And it's always difficult to predict, long term, how that will play out as that becomes the normal -- the normal battle. But definitely, some of them are just temporary fill-ins, but some of them could definitely play into a more permanent situation based on how well we've been able to -- how reliable we've been to our OEMs.

Got it, got it. So basically, I think, the last quarter -- I mean, first quarter '20, you guys guided -- I mean, you guys talked to go high end of the guidance and basically, like 5%, something higher than the midpoint. And you were guiding like 5% to 10% of the impact, possible impact from COVID. And it looks like your Q1 result was like as if there was no impact from COVID at all. So I wonder, it definitely demonstrates how strong your global footprint is supporting the results and supporting your customers. And last quarter, I think Lam Research announced they're going to have a new manufacturing plant in Malaysia, and I assume your global manufacturing and the supply chain network is good to support the Lam's new factory. But are you expecting any of the adjustment or changes you're going to make to your manufacturing footprint or supply chain network? I know this is a long-hold question, but any color would be great.

Yes. On the first point, we did see some of the -- we had factored in some pushing out into Q2, and that did happen due to both customer date shifting on us, as well as in some areas, we weren't able to keep the additional -- the original date. But in many cases, we are able to mitigate it and deliver what we -- we wasn't clear we could deliver in Q1. So in Q1, it was a mixture of mitigating more of the pushouts than we anticipated as well as additional revenue from products that we responded to in the moment to provide that we weren't expecting in Q1 because there was a demand and we were jumping in to help out where others weren't able to deliver.So it's difficult to bridge, but it was kind of a combination of mitigating some of the original pushouts and some of the constrictions that we had, as well as picking up, in the last minute, some business to fill in for the OEM. As Lam moves more towards Asia, being our largest customers, then you -- I think you'll continue to see us shift more and more of our manufacturing to Asia. We've been on a steady increase over the years. We've seen more and more move from our North America plants to our Asia plant. And so we will definitely continue to match that. And I think you -- especially, I think you could see Singapore. Our Singapore facility grew over the last 3 or 4 years from only a few million dollars a quarter up to a significant, at some point, it's around $100 million a quarter or so. So we're definitely growing Asia. We'll continue to grow Asia. That may accelerate it when their plant is up and running. We may see a further shift, so we'll definitely accommodate that to make that happen. And we are well set up to do that.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Jim Scholhamer for any closing remarks.

Well, thank you for joining us today, and I hope everyone stays safe and healthy until we speak again in the second quarter. Thank you, all.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.