Ultra Clean Holdings, Inc. (NASDAQ:UCTT) Q1 2024 Earnings Call Transcript May 6, 2024
Ultra Clean Holdings, Inc. misses on earnings expectations. Reported EPS is $-0.21076 EPS, expectations were $0.13. UCTT isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
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.
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