Ultra Clean Technology (UCT) has delivered a robust performance for the first quarter of 2024, surpassing earnings expectations with solid financial and operating results. The company, which trades under the ticker UCTT, reported a total revenue of $477.7 million, with earnings per share (EPS) of $0.27.
The positive outcome was attributed to a surge in orders from the domestic China market and the demand for high-bandwidth memory and advanced packaging to support artificial intelligence (AI) applications. UCT's outlook remains optimistic, with anticipated consistent demand in China and a broader-based recovery expected in 2025.
Key Takeaways
- UCT's Q1 revenue reached $477.7 million, with a gross margin of 17.9%.
- Earnings per share stood at $0.27, with net income totaling $12.1 million.
- Orders were bolstered by strength in the China market and demand for AI-related semiconductor technologies.
- Two prestigious awards were received from Texas Instruments (NASDAQ:TXN) and Intel (NASDAQ:INTC) for outstanding performance.
- Q2 revenue is projected to be between $465 million and $515 million.
- The company anticipates double-digit growth in wafer fabrication equipment (WFE) in 2025.
Company Outlook
- UCT expects demand in the China region to stay the same or increase slightly through the year-end.
- A broader-based recovery is predicted for 2025, with UCT prepared to outperform during the industry's next growth phase.
Bearish Highlights
- Despite improvements, a significant recovery in performance from largest customers Intel and Samsung (KS:005930) has not materialized.
- Memory customers' utilization rates are not expected to improve until 2025.
Bullish Highlights
- Strong demand from Chinese OEMs is projected to continue throughout the year.
- The company is poised to outgrow the market due to opportunities in acquired businesses and potential market share gains.
Misses
- There were no specific financial misses reported in the earnings call.
Q&A Highlights
- CEO Jim Scholhamer discussed UCT's relationship with ASML (AS:ASML), expecting growth within the coming years.
- Scholhamer anticipates low-double digit growth in WFE in 2025 and aims to outperform the market leveraging HIS acquisition, fab build-outs, and market share increases.
- Improvement in memory customers' utilization is expected in the latter half of 2024, with equipment orders to follow in 2025.
The strong quarterly performance by UCT is a testament to the company's strategic positioning in the semiconductor industry, especially in light of the growing domestic market in China. With the anticipation of sustained demand and strategic growth plans, UCT is setting a confident tone for its future prospects.
InvestingPro Insights
Ultra Clean Technology's (UCTT) first quarter performance in 2024 has certainly caught the market's attention, with the company demonstrating resilience in a challenging environment. According to real-time data from InvestingPro, UCTT's market capitalization stands at $1.92 billion, reflecting investor confidence in the company's market position and growth prospects.
The company's stock has seen a significant price uptick, with a 6-month total return of 70.75%, suggesting that investors are reacting positively to UCTT's strategic initiatives and market opportunities. This aligns with an InvestingPro Tip indicating a high return over the last year, which can be a sign of strong investor sentiment and potential for continued performance.
Despite the impressive stock performance, the company's P/E ratio remains negative at -61.64, with an adjusted P/E ratio for the last twelve months as of Q4 2023 at -79.12. This could indicate that although the company is currently unprofitable, investors are pricing in future growth expectations. Indeed, another InvestingPro Tip notes that net income is expected to grow this year, which could explain the market's optimistic valuation of UCTT.
For readers interested in a deeper analysis, there are additional InvestingPro Tips available, which provide further insights into UCTT's financial health, including aspects such as earnings revisions, gross profit margins, and liquidity. Subscribers can access these tips on InvestingPro's platform, and new users can take advantage of a special offer using the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription. With 13 additional tips listed, investors can gain a comprehensive understanding of UCTT's potential trajectory and make more informed decisions.
Full transcript - Ultra Clean Holdi (UCTT) Q1 2024:
Operator: Good afternoon, ladies and gentlemen, and welcome to the Ultra Clean Technology UCT First Quarter 2024 Earnings Call and Webcast Conference Call. At this time, all lines are in listen-only mode. Following the presentation we, will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Monday, May 6th, 2024. I would now like to turn the conference over to Rhonda Bennetto, Senior Vice President of Investor Relations. Please go ahead.
Rhonda Bennetto: 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?
Jim Scholhamer: Hello everyone and thank you for joining our call this afternoon. I will start with a high-level summary of our financial and operating results for the first quarter then share some thoughts on the broader industry and trends we are seeing. I'll close by highlighting a couple of important awards before turning the call over to Sheri for a more inclusive financial review, before opening the call up for questions. We reported a solid first quarter at the top and bottom line. The increase in orders above midpoint was driven by ongoing strength in the domestic China market and high-bandwidth memory and advanced packaging demand supporting AI. Earnings came in above our guided range due to higher volume, favorable mix, and our ongoing focus on site efficiencies. Elevated domestic China demand underscores the importance that the Chinese government and chip industry has placed on becoming self-sufficient. Chinese chip companies are rapidly investing in new semiconductor factories to advance the nation's capabilities and address export controls imposed by the U.S. and its allies. We recently celebrated the 20th anniversary of our Shanghai facility and are ideally located to support our local customers' growth plans. Based on external analysis and our customer roadmaps confirmed by our internal marketing intelligence, we anticipate demand levels in the region to remain consistent or even increased slightly through the end of this year. The second reason revenue increased beyond our expectations was related to areas of deposition and edge demand and high bandwidth memory and advanced packaging supporting AI. Artificial intelligent models are advancing rapidly so that they can run on edge devices like PCs and smartphones, creating new and compelling capabilities in both the consumer and enterprise sectors. Additional industry investment is required to meet the forthcoming demand for advanced computing, memory, and storage. So, growth is likely to be uneven within the value chain for a while yet. In this landscape, successful favor those who are capable of quickly driving technological progress, while also introducing innovation that disrupt the complexity associated with semiconductor fabrication. UCT supports the world's technology leaders in this sector and our deep relationships with them are helping to advance their roadmaps with positive results. The drive for localized chip manufacturing capabilities happening now in several countries is another tailwind that will support future demand and elevate UCT's significance with our customers. In the U.S. alone that CHIPS and [indiscernible] Act has committed $30 billion to-date, supporting $275 billion in investments by 2030. As chips become increasingly critical to multiple industries and use cases around the world, the long-term outlook for the semiconductor market is very robust. The expansion and diversification of our vertical capabilities over the past several years gives us a distinct competitive advantage to participate at all levels of industry growth from pad construction support, to equipment build out, to production services like part recycling and refurbishment, cleanliness, and analytics. Furthermore, our dedication to manufacturing excellence remains unparalleled, distinguishing us from competitors and solidifying our leading position. For example, we are honored to have received two very prestigious awards recently. First, we were recognized by Texas Instruments with their 2023 Supplier Excellence Award. This award is reserved for an elite group of suppliers with exemplary performance in the areas of cost, environmental and social responsibility, technology, responsiveness and assurance of supply and quality. And for the second year in a row, we earned Intel's 2024 EPIC Distinguished Supplier Award for consistently exceeding expectations. As one of only 27 award recipients, UCT stood out among thousands of other suppliers because of our relentless drive to improve and serve as a benchmark for other suppliers across the ecosystem. We believe that supply and demand will incrementally rebalance throughout the rest of this year. However, our opinion has not changed and we expect a broader-based recovery in 2025. We're performing effectively and have achieved notable advancements in streamlining and expanding our capacity to mirror the evolving demand and technology shifts, we see coming. Mindful of these trends, we have strategically mapped out our global footprint to ensure a diversified and efficient manufacturing presence supporting all our global customers. We are pleased with UCT's execution and are prepared to outperform again through the next phase of industry growth. And with that, I'll turn the call over to Sheri for our financial review. Sheri?
Sheri Savage: 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, in the first quarter, we saw an increase in our products business within the China domestic market and some new demand for products supporting AI, which we expect to stay around these levels. Our service business also saw elevated demand from China, along with some additional business from a fab relocation. Total revenue for the first quarter came in at $477.7 million compared to $444.8 million in the prior quarter. Revenue from Products increased to $418.5 million compared to $389.7 million last quarter. Services revenue was $59.2 million compared to $55.1 million in Q4. Total gross margin for the first quarter increased to 17.9% from 16.7% last quarter. Products gross margin was 15.8% compared to 14.6% in the prior quarter, and services was 32.3% compared to 31.7% in Q4. 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. Operating expense for the quarter was $54.5 million compared with $51.3 million in Q4. As a percentage of revenue, operating expense remained flat compared to Q4 at 11.4%. Total operating margin for the quarter increased to 6.5% compared to 5.2% in the fourth quarter. Margin from our products division was 6% compared to 4.6% in Q4, and services margin was 10.1% compared to 9.5% in the prior quarter. Margin improvements were largely due to higher revenue and operating efficiencies. Based on 45.1 million shares outstanding, earnings per share for the quarter were $0.27 on net income of $12.1 million compared to $0.19 on net income of $8.5 million in the prior quarter due to favorable product mix and factory utilization. Our tax rate for the quarter was 19.7% compared to 16.4% last quarter. We expect it to stay in the high-teens for 2024. Turning to the balance sheet. Our cash and cash equivalents were $293 million compared to $307 million in Q4. Cash flow from operations was $9.8 million compared to $35.3 million last quarter. The change in cash flow from operations was due to year-end compensation payments and increased inventory to meet elevated demand. In early April, we amended our Term B debt facility to extend it to February 2028. Strong demand from existing and new high-quality lenders, enabled us to incrementally upsize the offering by $20 million and reduce our interest rate by 0.25 point. In conjunction, we extended the maturity of our revolving credit facility to August 2027. For the second quarter, we project total revenue between $465 million and $515 million. We expect EPS in the range of $0.16 to $0.36. And with that, I'd like to turn the call over to the operator for questions.
Operator: Ladies and gentlemen, we will now begin the question-and-answer session [Operator Instructions] Your first question comes from the line of Charles [ph] from Needham. Please go ahead.
Unidentified Analyst: Hi. Good afternoon, Jim, Sheri, congrats on the solid results and very strong guidance. I think, Jim, in your prepared remarks, I got the sense that your strength in Q1 seems to be primarily due to some of the upside you see with your Chinese OEM customers, and I did notice that in your PowerPoint that the category called other OEM, meaning outside of Lam and Applied, seems to have seen the most amount of growth. But it gets a little bit hard for me to reconcile, because China revenue has been like a single-digit of percent of your total revenue. So how do I think about your actual exposure to the Chinese OEMs at this point?
Jim Scholhamer: Yes, Charles. Yes, you're right. The Chinese revenue is directly to the OEMs, is relatively small, but it's actually doubled, I think, over the last two or three quarters and then nearly doubled again. So and if you think about our overdrive on revenue, I mean, that was about half of it. The other half was on deposition tools that are used in the AI applications.
Unidentified Analyst: Got it. So it sounds like the HCM or AI side, it's probably largely dominated by deposition type of tools, probably electroplating, if I have to take a guess.
Jim Scholhamer: That's a good guess.
Unidentified Analyst: Thanks, Jim. So maybe another question about Service. Sheri, you mentioned about fab relocation as part of the reason for the service revenue strength. What do you mean by that, fab relocation?
Sheri Savage: Yes. We had a customer that moved some of their parts that needed to be cleaned to a different location. And as a result, we had some additional revenue flow through the services P&L.
Unidentified Analyst: Got it. That's not a China customer, no?
Sheri Savage: No. No, it is not. With every incremental dollar that we put into service, basically, it really helps bring that margin up with the volumes flowing through there.
Unidentified Analyst: Got it. So maybe your two largest -- I mean, fab customers, I would guess, it's Intel and Samsung. But how are the business there trending so far? Is it still looking quite positively so far?
Jim Scholhamer: Yes, me again, Charles. So it's -- positive would be optimistic. It's definitely inching up. It has inched up a little bit as you saw. It's not an extremely strong recovery, but we are seeing signs of utilization starting to increase and some of the idled systems starting to be put back and getting ready for a scaling up. So yeah it is getting a little bit better, but it's not extremely steep curve yet.
Unidentified Analyst: Thanks Jim and Sheri, congrats on the results. I'll hop back in the queue.
Jim Scholhamer: Thanks Charles.
Sheri Savage: Thank you.
Operator: Your next question comes from the line of Krish Sankar from TD (TSX:TD) Cowen. Please go ahead.
Krish Sankar: Yeah, thanks for taking the question, and congrats on the strong results. I’ve couple of questions. One is a follow-up on Charles' question. On the China revenues, you mentioned the domestic China strength. Is that comment related to what you're seeing from China semi-cap OEMs, or is that also tied to your US semi-cap customers? Because my understanding was that you might not have the visibility with the US semi-cap customers where the end customer is?
Jim Scholhamer: Yes, you're right, Krish, we don't usually have the visibility or we have it but it's in thousands of pieces on where we're shipping everything. But this is direct business from our Chinese factory directly to Chinese OEMs who've been servicing several of these OEMs for over 15 years. We have long relationships with them and we're pretty unique in the supply chain to have that where we're directly supplying into the OEM in China and have been doing that for a long time. We've seen a significant like I mentioned earlier to Charles, we've seen that business grow from mid-single digits to double and then double again. We expect that to continue throughout the year. And as we as we look into what's going on with it and where it's going, we estimate about -- just anticipating your next question Chris, we anticipate about half of it is going in directly at the line and going into production. And the other half is a little bit pre-ordered in anticipation of perhaps some more rules coming down of the trade restrictions. So not all of it, we think is being driven directly as an immediate need, but it's been a very healthy growth and we think it's not just the stockpiling these. These customers are picking up new applications and are starting to grow much faster than we've seen over the last 15 years.
Krish Sankar: Got it, got it. It’s very helpful Jim. And then like a follow-p, obviously, one of your US semi-cap OEMs, we have pretty good exposure to some of the lagging edge product nodes eventually the selling. I’m just kind of curious I understand China demand is very strong, which is lagging edge. But how do you see the non-China lagging edge demand?
Jim Scholhamer: I'm sorry, non-China what demand?
Krish Sankar: Leading edge?
Jim Scholhamer: The lagging edge demand has also been strong and that's what you're asking about. But it’s, think that strength was appeared maybe a quarter two ago, and it's starting to maybe temper a little bit, but it has been elevated.
Krish Sankar: Got it, got it. And then one final question. Obviously I think you've spoken about ASML exposure in the past year. The demand is starting probably for more of the high-pressure components was ASML greater than 10% customers, or is still too small for you?
Jim Scholhamer: It is not. It’s mid-single digits and on its way, we believe in a within a few years. But yeah it’s -- I think Charles mentioned the other. The other has ASM, ASML, KLA as well as the Chinese OEM. So that's where you see a lot of the numbers pile up.
Krish Sankar: Very good. Thank you very much. Very helpful.
Operator: Your next question comes from the line of Christian Schwab from Craig-Hallum Capital Group. Please go ahead.
Christian Schwab: Congrats on the good quarter. Jim, when would you anticipate your memory customers utilization to improve enough to show up in the Clean business?
Jim Scholhamer: We're anticipating – we've been pretty consistent about the WFE side of it, the product side, probably not improving until 2025, and I think we are sticking with that. On the services side, it's difficult to predict. It's definitely outside of our bottoms-up window. But you would anticipate from the past that we'd see that start to tick up in this latter half of 2024 to start to see the equipment orders coming in, in 2025.
Christian Schwab: Okay. Okay. And what is your kind of baseline thoughts of what you would anticipate WFE growth to be in 2025? And then the next question to that would be what type of growth rate would you anticipate you'd be positioned for to outgrow WFE on a go-forward basis, similar to what you did in the last up cycle?
Jim Scholhamer: Yes. I think we're -- our current views, which we're always updating is low-double digit in 2025 growth in WFE. And of course, it's always difficult to predict and things tend to be stronger than you expected weaker than you expect, depending on the -- where we are in the cycle. As far as outgrowing, I think it's the same formula we've been following for years that have led to our outgrowing WFE. We have a lot of, I'd say, where is a lot of the runway or the green pastures, the opportunities. The HIS acquisition has a lot of growth expected in that segment with all the fab build-outs and there's strong position there that we're making stronger from our Fluid Solutions acquisition as well. I mean we have a relatively have a great product line, but a relatively small market share versus the two industry leaders, but we've been working on getting those qualified in our main customers that prior to our acquisition, that was a slower slog for Ham-Let, the company that we bought. So we're seeing that accelerate, as well as, I think, with – I would say we're pretty well penetrated at our largest customer, but I think when you look at the second, third and fourth, there's a lot of opportunity there for market share growth within those customers.
Christian Schwab: Okay. No other questions. Thanks, guys.
Jim Scholhamer: Thanks, Christian.
Sheri Savage: Thank you.
Operator: There are no further questions at this time. I would like to hand the call back to Jim Scholhamer for closing remarks.
Jim Scholhamer: Thank you everyone for joining us today. We look forward to speaking with you again next quarter.
Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
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