Good day, ladies and gentlemen, and welcome to the Ultra Clean Technology Q4 and Full Year 2023 Earnings Call and Webcast Conference. [Operator Instructions] This call is being recorded on Wednesday, February 21, 2024. I would now like to turn the conference over to Rhonda Bennetto. Please go ahead.

Thank you, Operator, good afternoon, everyone, and thank you for joining us. 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 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. 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 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 remained less than ideal as our products customers continued to shift mix and location to help expedite the normalization of inventories. Our global footprint and ability to quickly flex to meet demand was an advantage in the quarter. Our services business stayed relatively flat as customers maintained current output levels. For 2023, our revenue and earnings largely reflected the overall decline seen 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 operations and increasing capacity to support the next ramp were 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 workflows, 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 sites 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…

Thanks Jim and good afternoon everyone. 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 inventories. 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. Products 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.…

[Operator Instructions] Your first question comes from the line of Krish Sankar from TD Cowen. Your line is now open.

Hi, thanks for taking my question. Jim, a question for you. I think 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, many semi-cap companies have spoken about a second half inflection, you said more like exiting calendar '24 is when they see the inflection. I want to make sure that are we on the same page or do you think there's more inventory drawdown from your customers before you see a benefit for Ultra Clean?

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

Got it. I think that's very helpful and makes a lot of sense. Then quickly on the EV side, you kind of mentioned, so my understanding is you guys have more of the high pressure part of the EV versus low pressure. I'm just kind of curious, is there a possibility of you gaining share on the low pressure side, or are you just mostly focused on high pressure EV at ASML?

Yes, I think we are on the high pressure side, and especially a lot of the new products that they're 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 Cymer side, you know the laser areas and some of the older tools. So we have a kind of scattered footprint throughout the ASML tool sets, but the majority of what we're working on are the new tools, and that's where we're seeing the large modules start to roll out and increasing in numbers.

Got it. And then just like a quick housekeeping question for Sheri. I understand you said OpEx would be or the expenses would be higher in the March quarter. How do you think about gross margin in March relative to December?

Yes, I would say it's going to be fairly flat. You know, obviously it's really dependent upon where we ship out of things kind of shifted quite a bit during Q4 and I think 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.

Okay, thanks, Sheri, thanks Jim.

Thank you.

Thank you. Chris.

Your next question comes from the line of Christian Schwab from Craig-Hallum Capital Group. Your line is now open.

Hi, guys. Hi Jim on -- with revenue being down you know 27% year-over-year, when WFD was obviously down much less than that year-over-year. So I understand the ICAP's commentary but or mature node commentary, but you know as this inventory cleans up, is there an opportunity for a material ladder step-up in the second half? I guess it wasn't clear to me in the before question or do you just expect a modest recovery from where you are in Q1?

Yes, I think a latter step 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 in what our customers have in inventory, and even their demand is shifting around as we saw in the last quarter. We know the inventory levels are high. You know we don't know how much they still have of what we made and our competitors made. 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. We're just assuming kind of some incremental moves up and at some point the cork will come off the bottle and then demand will more better reflect the WFE numbers as you mentioned, the inventory was a headwind, the deferred revenue was a headwind, you know the strong ASML and high caps and MDP metal deposition was really strong for Applied. So those are areas that are not very gas-intensive. So those were all headwinds we had in 2023, as well as depth, and NAND affecting quite a bit as well. So a lot of those headwinds will 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.

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

No, I mean we've outgrown on the upturn multiple times. In an upturn, the inventory disappears pretty quickly as well. The inventory build-up only happens when the market suddenly shuts down like it did in November of 2022. That's where the inventory piles up from everything in the float. So, yes, we have a lot of factors. We've been picking up share at multiple customers, we're doing a very well, especially with these new modules for litho that are starting to ship in larger quantities. Malaysia factory we're putting some new winds into that factory. So we're still growing share and I expect we'll do what we've done in the last since I've been here the last three upturns that will outgrow again.

Fantastic. No other questions. Thank you.

[Operator Instructions] There are no further questions at this time. I will now hand the call over to Jim Scholhamer. Please continue.

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

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