Annie Leschin - IR Jim Scholhamer - CEO Sheri Brumm - SVP and CFO.

Christian Schwab - Craig-Hallum Capital Richard Ryan - Dougherty & Company Unidentified Analyst - Needham & Company Patrick Ho - Stifel, Nicolaus & Company.

Welcome to the Ultra Clean Technology Q1 2017 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions]. Please note today's event is being recorded. I would now like to turn the conference over to Annie Leschin of Investor Relations. .

Thank you operator and good afternoon everyone. Thank you for joining us on our call today. With me today are Jim Scholhamer, Chief Executive Officer and Sheri Brumm, Senior Vice President and Chief Financial Officer.

Jim will begin with some prepared remarks about the business and Sheri will follow with the financial review, after which we will open up the call for questions. Earlier this afternoon, we issued a press release reporting our Q1 2017 financial results.

The press release information about the webcast and how to access the replay of the call can all be found in the investor relations section of our website at uct.com.

Before we begin, let me remind you that today’s call may contain forward-looking statements, including the company’s views regarding future financial performance, new products or orders, and shipments and industry growth.

Investors are cautioned that forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those projected in the forward-looking statements.

Information concerning these risks and uncertainties is contained in our periodic filings with the SEC, including our most recent Form 10-K and Form 10-Q and in the press release relating to today’s call, which is available again on the investor page of our website.

All forward-looking statements are based on management’s estimates, projections, and assumptions as of today. And UCT assumes no obligation to update them. Today’s call includes non-GAAP adjusted financial measures. Reconciliations to GAAP measures are also contained in today’s press release, which is available on the investor page of our website.

Now I would like to turn the call over to Jim.

Jim?.

Thank you Annie and good afternoon everyone. Thank you for joining us today for our first quarter conference call and webcast. UCT's strong momentum through 2016 continued into the first quarter of 2017 as we hit new records in revenue and profitability. Demand for semiconductor wafer processing equipment remains extremely strong.

This high growth environment is just one of several factors driving UCT to these new levels of performance.

We are benefiting from the overall strength in the WFE market, our focus on the fastest growing areas of deposition and removal steps, and continued success in delivering new modules and components which are increasing UCT's delivered content on our customer's offerings. In addition we are seeing a new factor come into play.

With our industry know how and ability to get things done, we are also picking up business by meeting shortfalls in capacity across the supply base and filling additional demand from our customers. Our ability to execute across the board is leading to increased business and strengthening of our customer relationships.

Overall the result was better than expected for top and bottom line financial results for the first quarter. Total revenues grew 82% from last year to $204.6 million. Semiconductor revenue increased 80% and revenue from outside the U.S. rose 115% year-over-year.

At these levels we are seeing the leverage of our financial model to drop more to the bottom line as non-GAAP EPS increased from breakeven in last year’s first quarter to $0.47 in the first quarter. 3D NAND and the ramp of 10 nanometer Logic continues to drive the majority of the growth in the semiconductor market.

The main difference between the current cycle and previous one is there is not just one technology transition driving the industry's long-term investment cycle. Instead, the industry is becoming far more diverse as the world requires semiconductors in virtually every aspect of life.

The common factor that is driving the need for all these chips across multiple applications is data. Looking forward from artificial intelligence to self driving cars to the Internet of things there is a proliferation of chips and sensors which feed into Logic, processing, big data, storage, and the whole infrastructure required to support its use.

When you put it all together there are multiple technology inflections occurring over the next few years that we believe will strengthen the WFE market and provide much more balanced demand going forward.

The challenge at times like these can be managing to meet the customer’s needs in an environment of rapidly expanding output especially if semiconductor equipment OEMs are seeking to optimize their production capacity. This is where UCT continues to outperform.

Our focus on the semiconductor equipment market and the investment we made in anticipation of the current ramp have allowed us to grow faster than the industry over the last several quarters.

With our vertical integration, technical capabilities, strong supply chain partnerships, and our culture of intense customer focus we are playing a vital role in our customer's success.

UCT is being recognized by our customers for our ability to manufacture high quality products in locations close to customers and deliver reliably within the exceptional demand environment and supply chain challenges. This has led to a deepening of our customer relationships and is expanding our opportunities for future growth.

In addition our display business continues to be strong. Investments in OLED are continuing as leading companies ramp the technology and demand outstrips supply. Additionally the build out of Gen 10.5 for large area TV's is leading to the construction of multiple new fabs in the industry, something we have not seen for many years.

As a result spending in the display equipment market is reaching unprecedented levels. The trend will drive our display revenues to continue at two to four times our historical rate.

The combination of healthy end market demand in established market segments and multiple new opportunities are setting the course for another year of significant growth for UCT.

Looking at our customer’s report our outlook for the remainder of the year has improved and long-term we are encouraged by the demand drivers supporting the WFE display market.

Our team's commitment to the operational excellence and putting the customer first continues to differentiate UCT and is delivering exceptional financial results and long-term shareholder value. Now I would like to turn the call over to Sheri to review our financial results in more detail after which time we will open the call for questions.

Sheri?.

Thank you, Jim. In today's discussion I will be referring to non-GAAP numbers only. A reconciliation can be found in the press release issued earlier today.

We had a very strong start to the year as our entire team worked to achieve our record breaking revenue and profitability and meet our customer's increasing demands in a timely manner with high quality. As a result we exceeded our expectations on the top and bottom line.

Total revenue for the first quarter was 204.6 million, an increase of 17.2% from the prior quarter. Semiconductor revenue reached historical highs of 191 million, a sequential increase of 22.4%.

This strong growth was the result of ongoing industry momentum, new modules coming online, and additional drop in orders received during the quarter from key customers. Semiconductor revenue was 93.4% of total compared with 89.4% last quarter. Manufacturing closer to our customers continues to prove successful as revenue from outside the U.S.

reach a record high of 105.8 million or 51.7% of total revenue compared to 89.9 million or 51.5% in the fourth quarter. Our display revenue has continued to run at historically high levels. However we expect to see fluctuation in display investment.

As a result our non-semiconductor revenues came in at 13.6 million as compared to last quarter at 18.5 million. High revenue levels and increased factory utilization coupled with our strong operational excellence led to margins slightly above our target range in the quarter.

Gross margins in the first quarter were 18.3% versus 17.4% in the prior quarter. Operating expenses for the fourth quarter were 16.5 million or 8.1% of revenue compared to 15.1 million or 8.7% in the fourth quarter. First quarter operating income was 21 million compared to 15.3 million for the fourth quarter.

Operating margins improved 150 basis points from the last quarter to 10.3%. As we invest to scale our business, we are constantly looking at ways to manage our cost structure to meet record levels of demand we are seeing while driving leverage from our model. Our first quarter tax rate was 20.8%.

For the second quarter of 2017 we expect our tax rate to be approximately 22%. First quarter net income was 15.9 million up 32.4% from 12 million in the fourth quarter. Non-GAAP EPS of $0.47 improved 31% from $0.36 last quarter.

As we scale the business and reach all time highs in revenue while maintaining our cost structure, the leverage of our model is becoming even more clear. In the first quarter we generated 9.6 million in cash from operating activities compared to 8.2 million in the prior quarter.

We had non-cash charges of 1.4 million related to stock compensation, 1.2 million in depreciation, and 1.2 million for amortization of intangibles. Turning to the balance sheet, net liquidity increased 6.1 million during the quarter.

Cash grew 2.5 million to 54.9 million as debt principal payments and fixed asset purchases offset some of the cash generated from operating activities. Our outstanding debt decreased sequentially by 3.6 million to 64.2 million. DSO's increased to 42 from 38 days last quarter due to timing of shipments.

Days payable outstanding climbed to 51 days from 44 due to higher raw material purchases towards the end of the quarter in order to meet the increase expected in the second quarter. Net inventory increased by 19.2 million over the prior quarter to support second quarter demand. We anticipate second quarter inventory to be flat.

That concludes our prepared remarks. Operator I would like to open the call for questions..

[Operator Instructions]. The first question is from Christian Schwab at Craig-Hallum Capital Group. .

Oh, great and thanks for taking my question.

My first question Jim is one, obviously you are doing well on the wafer front and Dep & Etch side, can you give us a little bit more clarity on where you are within all this other new module business from?.

Yes, hi Chris and thank you. So starting with the three drivers you mentioned two of them. You are right, the WFE continues to be very strong. We are benefiting from also our higher position in Dep & Etch as you mentioned.

The new models that we've been working on over the last several years have been key area of focus for us and we continue to execute according to our plans and bring new revenue in there. We are very pleased with our progress in that space.

I think the interesting new wrinkle or the new development that happened in this quarter was an unprecedented level of demand, a new demand coming in from our customer supply chain challenges that are occurring and our ability then to step up and meet their immediate needs. .

Okay, excellent and given that you kind of mentioned previously that your customers are at full capacity should wafer, should spending environment remain as it is or improve, that opportunity there should only expand, is that correct?.

Yes, that's correct. We continue because we've been able to execute operationally so well and jump in and help our customers with their capacity constraints and also with supply chain constraints we're continuing to see new opportunities unfold as we go. .

Great and then my last question, we've heard from one of your two significant customers and your results kind of rhyme with theirs and so would -- they still anticipate the second half to be less than the first half but maybe not as dramatic of a falloff as they previously expected, would we expect your results to kind of mirror that?.

Yeah, I think that's a fair assumption. .

Okay, great, no other questions. Great quarter, thanks guys..

Thank you Christian. .

The next question is from Dick Ryan at Dougherty. .

Sure, thank you.

So Jim in regards to the shortfall in the supply chain, is there a way to quantify how much business was driven your way due to the inability of your competition?.

Hi Dick, no we haven't really broken that out. I mentioned it because it's basically a fourth new element that’s just been developing. We saw some of that hit in the fourth quarter, I'm sorry the first quarter. And we expect that, that will continue to grow as our execution continues to shine.

But I think to quantify that is difficult at this point but it is meaningful. .

Okay, I think on the last call you were two thirds of the way through Q1 and with the supply chain tightness you gave a little perspective for Q2.

I know you just made some general comments on the second half but is there any early read that you can give us on Q3?.

No, as you know we won’t guide to Q3. However, I think echoing what Liam [ph] has said as they continue to see much closer balance for the second half or towards the first half and obviously their clarity on Q3 is better than obviously than Q4. .

Sure. Okay, great, thank you and congratulations..

Alright, thank you Dick..

The next question is from Edwin Mok at Needham & Company..

Edwin?.

Mr. Mok do you have your phone muted. Okay, we will go on….

Hi, sorry this is Arthur actually on for Edwin. Sorry for muting this phone.

Congrats on a great quarter and guidance, first question is on 2Q, how should we think about the growth in both your semi and non-semi businesses directionally are going into 2Q and is there a way that you can quantify the magnitude of growth in either segment?.

I think we don't think of a display growth quarter-on-quarter by itself obviously non-semi which is dominated by display. We continue to see in that segment that it's going to come in at roughly two to four times its historical levels.

We mentioned in prior calls that historically that business was around $3 million or $4 million a quarter and we expect it to bounce around from one quarter to another and it is more of a lumpier business between two or four times that level. As far as the semiconductor obviously, the remaining part of the growth is due to semiconductor. .

Thanks for that color. And then as we think about OPEX in the 2Q.

I might have missed it earlier Sheri but how should we think about OPEX in 2Q and given that the business has been running at such a higher rates Sheri, how should we think about UCT’s production capacity and need for investments either in OPEX or CAPEX?.

Okay, so from an OPEX perspective that's a good question. We have -- our model has typically been about a 9% OPEX run rate. You are seeing us being able to leverage that model much better at higher revenue levels. So from a Q2 perspective I would assume that it's going to be a little better from a percentage of revenue perspective.

Obviously we may need to have some incremental expense adds but it's, you know, we're keeping a really tight eye on the expenses in general. So, I would say a little bit lower quarter-over-quarter but not a lot..

I guess I will field the capacity part of your question. Yeah, obviously we have capacity to continue to grow and as we run into wherever there is a capacity constraint there's really not any significant investment needed to change it to expand that.

So we feel very comfortable that we will be able to continue to expand our capacity for the industry needs without adding any additional major capital or investments. .

Awesome, thanks. That's all I had..

Thank you. .

The next question is from Patrick Ho at Stifel, Nicolaus..

Thank you very much and congrats as well. Jim you mentioned in your prepared remarks about the supply chain and how it's tight basically throughout the entire the food chain.

So, from your perspective given that you were able to meet some of the incremental and additional demand from your customers what is it that you're doing on the supply chain that allows you to basically churn out these products and meet your customers demand, how are you managing your supply chain to meet this incremental demand?.

Hi Patrick, thank you, good question. I think one of the first things that we did is we prepared for the ramp. We could see it coming, we could see all the forces in place and we basically set ourselves up to have the capacity and the supply chain infrastructure needed to basically double our output within around the year.

So the first -- the key part was preparation across all fronts. I think the second part was the continued -- we have a very intense focus on the customer so we can see the pain point start and some of the issues that they're experiencing in either products that we're competing in or even products that we're not providing.

I think we're very early on to sense that and to basically garner our forces to rush it and help in those areas and help our customers and also benefit us in our revenue. So I think the first part is being very proactive and the second part is being acutely intensely aware of what's going on and being very reactive within the moment. .

Great, that’s helpful.

And maybe as a second part to that question given that one of your leading customers also plays in the display market is there any fundability between the supply chain and the products they aware, as you mentioned the display can be even more volatile than semi but if there are pockets of quarters where you can see leverage some of the capacity for semis than more for display, and is that an aspect that’s also helped you in terms of meeting some of this what I would call extremely high semi demand that we're seeing today?.

Yeah, that's a great question. Operationally display and semi is managed by us in the same sites. The overlaps that we have, you know, we have certainly some synergy there. We do not have a separate operation for just display so they share an operational site. Concurrently supply chain often have the same types of supplier or even the same names.

Often the parts are different and the part numbers are different but the relationships with the suppliers, there's also a lot of synergy there. So yes, we have synergy between the two groups as far as our operational execution as well as their supply chain relationships. .

Great and a final question maybe for Sheri in terms of cash flow and the uses of cash.

As you look forward especially with some of the revenue levels that you are now posting and when you look at the balance sheet, the AR level has increased, there's going to be cash flow coming in the next couple of quarters, how do you look at that cash flow, is it going to be used to continue to pay down debt or are there other options for you on the table?.

Yeah, we obviously generated cash during the Q1 timeframe 9.6 million and we're always looking at our capital structure in general. So, the debt we have continued to pay it down over the course of the timeframe that we've had the debt and we anticipate that we will continue to do that.

That's something that we're constantly looking at from a strategic perspective as well. So in order to run the business obviously we have inventory to purchase as well as running the business so it is going to be something that we constantly review..

Great, thank you again..

Thank you..

Thank you. .

This concludes our question-and-answer session. I would like to turn the conference back over to management for closing remarks. .

Yes, well thank you everyone for participating and we look forward to seeing you all at our upcoming events. .

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