Good day, everyone, and welcome to the Ultra Clean Technology’s First Quarter 2019 Earnings Conference Call. All participants are in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask question. [Operator Instructions] Please also note hat today’s event is being recorded.

At this time, I like to turn the conference call over to Rhonda Bennetto, Investor Relations. Please go ahead..

Thank you, operator. Good afternoon, everyone, and thank you for joining us. With me 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 up with the financial review. Then we’ll open up the call for questions.

The press release issued earlier this afternoon, along with the information about the webcast, can be found on the Investor Relations section of our website at www.uct.com. Today’s call contains forward-looking statements that is subject to risks and uncertainties.

For more information, please refer to the risk factors disclosure of our SEC public filings. All forward-looking statements are based on management’s estimates, projections, and assumptions as of today, and we assume no obligation to update them after today’s call. Today’s discussion of our financial results will be presented on a non-GAA basis.

The reconciliation between GAAP and non-GAAP results can be found in today’s press release. And finally, we will be participating in the Craig-Hallum Institutional Investor Conference in Minneapolis on May 29 and the Cowen Annual Technology Conference on May 30 in New York.

In addition, we will be presenting and livecasting, the Stifel Cross Sector Insight Conference on June 11 in Boston, and you can find additional information on these conferences on our website www.uct.com/investor events. I will now turn the call over to Jim.

Jim?.

Thank you, Rhonda, and good afternoon everyone. Thank you for joining us for our first quarter 2019 conference call and webcast. First, I’m going to highlight a few financial results that Sheri will expand on in her commentary.

I’ll continue with review of our semi-conductor products and solutions business, including an update on our cost improvement initiatives and our recent acquisition. I’ll conclude with a recap of our semiconductor services business and then we will open up the call for questions.

As our first quarter results indicate, our approach is working, both in terms of our diversification strategy and our ability to deliver for our customers. Total revenue for the first quarter was 260 million above our guided range. Our products and solutions business contributed $200 million and our service business added 60 million.

Non-GAAP EPS also exceeded our guided range at $0.21 for the quarter. We were able to outperform our guidance as our products group executed on dropping and pulling orders and our service business saw an increase in sales from our largest IDM customer. Let me start with our products business.

Our direct visibility based on customer's orders is limited and can change significantly even within the quarter. Our performance as a key supplier enabled us to deliver last minute orders to meet our customer demand. The increase is due to adjustments in customer schedules and should not be viewed as a sign that the market has begun a recovery.

We see current industry conditions as relatively the same from a quarter ago. Industry CapEx plans for 2019 remains unchanged and measures are being taken to manage supply, output, and inventory levels, which bodes well for the industry heading into 2020.

We are taking advantage of the digestion period by optimizing our product manufacturing footprint, while broadening our capabilities. Also, these initiatives should increase profitability creating long-term value for our shareholders.

Last quarter, we introduced a series of rigorous cost improvement initiatives to increase profitability by eliminating redundant operational footprint and consolidating capabilities. The majority of these initiatives will take several quarters to finalize with the benefit of being realized in the latter half of the year.

We expect our annualized cost savings from the restructuring plan to be in the $15 million to $20 million range once completed later this year, with incremental margin expansion along the way. In addition, we are growing our product portfolio in available market and increasing our share in key semiconductor equipment commodities.

Recently, we announced the acquisition of Dynamic Manufacturing Solutions. DMS provides a complete range of weldment solutions, primarily to semi industry and is adjacent to our existing Austin, Texas facility. This acquisition is consistent with our strategy to pursue the same profitable growth in our core semiconductor business.

Our complementary technologies, together with our increased scale position us as a leader in the semiconductor equipment weldment space. This was a highly synergistic acquisition and immediately accretive to earnings. We expect DMS to generate over 5 million in adjusted EBITDA this year and add $0.05 to $0.07 to UCT's non-GAAP EPS.

By optimizing our operations to improve profitability and expanding our fleet of offerings, we will capitalize on the increases in demand for our products during the next brand. Now, I’d like to provide an update on our services business. Services had a strong quarter due to an increase in demand from one of our largest customers.

You will recall, we derive revenue in two ways. First, from servicing the installed base and secondly from processing new equipment related to semi-cap investment.

Recently, industry intelligence and IDMs earnings report confirmed by our marketing research indicate that chip inventory levels are declining and fab utilization rates have begun to pick up. In addition, leading edge nodes require more stringent cleaning specifications and analytical validation.

This transition bodes well for us as Quantum specializes in providing highly technical solution. In summary, we remain very upbeat about the demand drivers that will provide growth opportunities for our products and services business over the long-term.

We are taking the step necessary now to improve our profitability, increase our capabilities, strengthen our competitive position, and deepen our customer engagements to emerge a much stronger company. I would like to thank our employees and our shareholders for their continued support and I look forward to updating you on our next call.

With that, I’ll turn the call over to Sheri..

Thanks Jim, and good afternoon everyone. Thanks for joining us. In today's discussion, I’ll be referring to non-GAAP numbers only. During this quarter, we have elected to change our organizational and reporting structure to capture efficiencies and operating leverage due to the quantum acquisition.

We are now reporting results for two operating segments. Semiconductor Products and Solutions or SPS, and Semiconductor Services Business or SSB. We are providing a reconciliation of GAAP to non-GAAP segmented financial measures in the tables in our press release.

Both our products and services divisions performed well this quarter generating total revenue of 260.1 million, up just over 1% from last quarter and above our guided range. SPS contributed 200.2 million in revenue, and SSB added 59.8 million. Non-semiconductor revenue, which includes display, generated 15.2 million or 5.8% of revenue.

Total gross margin stayed at the higher end of our range at 17.8%, compared to 18.7% last quarter. SSB gross margin was 33.6% and SPS was 13.1%. Higher overhead and labor cost required to meet unanticipated late quarter demand impacted gross margin.

As we have shared before margins can be influenced by customer concentration, geography, product mix and volumes, and the timing of our restructuring initiatives, so you should expect to see variances quarter-to-quarter. Operating expenses decreased 3.4% to $30.3 million, compared to $31.4 million in the prior quarter.

As a percentage of revenue OpEx decreased to 11.7% from 12.2% last quarter. Operating margin for the first quarter was 6.1%, compared to 6.5% last quarter. Margin contributed from SSB was 12.8%, and SPS was 4.2%.

At year-end audit and accounting fees over time to meet late quarter demand and seasonally higher employer payroll tax expenses impacted margins. We expect our restructuring plan together with the synergies realized from our recent acquisition of DMS will have a positive impact on margins in the second half of this year.

Based on 39.4 million shares outstanding, earnings per share for the first quarter were 21%, derived from net income of $8.1 million. This compares to $8.7 million and $0.23 last quarter. Our tax rate for the quarter was 19.2%, compared to 17.2% last quarter. The increase was primarily due to the quantum acquisition, impacts of the U.S.

Tax Reform and the changes in the forecasted geographic mix of pre-tax income. Going forward, we expect our tax rate to be in the mid-to high teens but as always you can expect to see variances quarter-to-quarter.

Turning to the balance sheet, we ended the quarter with $154.8 million in cash and cash equivalent, an increase of $10.6 million over the prior quarter. Cash from operations was $18.1 million compared to $30.1 million last quarter.

Inventory decreased $5.8 million during the quarter and we will continue to manage inventory levels to closely match customer demand. Our second quarter outlook assumes total revenue between $245 million and $265 million and a non-GAAP EPS in the range of $0.12 to $0.22. And with that, I’d like to turn the call over to the operator for questions..

[Operator Instructions] Our first question today comes from Quinn Bolton from Needham & Company. Please go ahead with your question..

Hi, Jim, Sheri, and Rhonda. Congratulations on the nice result – relative to gain in for the first quarter.

Wanted to start with the pull ins that you talked about, while I understand its kind of just rescheduling of orders, I can't help but notice that revs were better both for Q1, but also the guidance for the second quarter is better than the Street. So, it feels like the business overall is performing a little bit better.

I'm just wondering if you could talk about where you think some of that strength may be coming from, then particularly kind of love to get your opinion on what you're seeing on the logic foundry side of business, because I think some of your peers that have reported this earnings season have noted that the foundry logic outlook may have upticked over the last 90 days?.

Yes, thanks Quinn. Yes, it was a combination of pull-ins and as you’ve noted also a drop-in orders as well. The majority of the strength, yes logic definitely played a key role, but in all chip types, you know of the leading-edge technologies there are still some investments that are happening that our little bit more difficult to predict.

So, it’s definitely leading-edge on all chip types, as well as logic being stronger than expected..

Okay, great.

And then one of the questions I had Lam on their call talked about the ability to go out and generate sales through the upgrade and process chambers in the field, I'm wondering is there any part of your business whether it’s components to gas channels that might benefit from field upgrades to your large OEM customers rather than new tool sales or does most of your revenue track new tool shipment?.

Good question. A lot of the action if you would is happening on upgrade businesses as well, and many of the upgrades require either a new gas panels or gas panel reconfigurations and new chamber ads require all the same material roughly as you would in new tools, so that is definitely an important part of our business, yes. And it’s also less visible.

It’s also less visible with a shorter lead time..

I assume that you’re seeing that sort of – that same trend that did in 2019 upgrade, just becoming a bigger part of the business?.

Yes..

Okay, great.

And then just a last question, wondering if you had mentioned Quantum saw strength at one of your leading customers, I assume that’s probably on the logic side, some of the memory manufacturers have talked about reducing wafer starts as a way to try to digest some of the over-capacity situation in the industry, wondering if you have seen impact on the memory side of Quantum’s business from reduced wafer starts?.

No. Obviously, we don't break it out in detail, but we haven't seen anything material on that side..

Okay.

Great and then just lastly, can you give us what you think that DMS contribution will be for the June quarter, I think in the press release when you announced the transaction it was about a 50 million revenue run rate, last year obviously overall demand was better last year should we be thinking maybe something in the [10-ish million dollar] range?.

Yes, that’s about right. We assume that they’ll give us $0.05 to $0.07 for the year. So, approximately maybe $0.01 contribution for this next quarter..

Great. Okay. Thanks very much..

Thank you..

Our next question comes from Karl Ackerman from Cowen and Company. Please go ahead with your question..

Hi, good afternoon Jim and Sheri.

Congrats on closing on DMS, my question is really kind of around towards the opportunity, you know we know the overall, both of your market should be down mid-to high teens this year, but have you seen a slowdown in outsourcing opportunities for your [indiscernible] as demand trends have softened, and if not you continue to see the greatest opportunities in the mechanical areas of each toolset which is wafer transfer across the chamber or are you seeing a pickup at all for gas panel?.

So, several questions, I think the first one being on outsourcing opportunities. Yes, we saw, obviously we saw during the upturn in 2016 and 2017 we saw great acceleration of outsourcing during that period and several quarters ago that obviously abated as the output continued to – it actually went down a bit.

So, outsourcing still occurs on a project by project basis, of things being outsourced, but definitely the accelerated rate of outsourcing that we saw in 2016 and 2017 is already kind of reflective in our business.

The second part, I think of your question is around where in the systems side of our business we’re seeing activities? Obviously, it hit all areas, but it is when upgrades increase you see a lot more action around the process chamber part of the tool and while the process chambers require gas panels, and so we see obviously increased activity in that space.

.

That’s very helpful.

You know, we mentioned briefly about pull-ins and what not, I guess what is your level of visibility in order rates today? And do you think that’s kind of improved at all over the last, perhaps couple of months?.

The visibility is low, and actually in the last few months it’s gotten even more difficult. I think one of the reasons that our customers view it as go to supplier is our ability to take a drop in or a pull-in and react to that.

And that’s – we call it churn and the churn in the industry especially during a slower period like now tends to be higher than when the market is moving up, the forecast is more stable and further out. We have more visibility.

So, our visibility is lower right now, but we’re benefiting from the fact that with our global presence in our broad capabilities that we’re able – we’re the go to supplier of the turnaround on a lot of those sudden orders..

Understand. And last question if I may.

One of your – one your traditional EMS providers ended up buying more of an display type business and I know your display business is not at the upside where it used to be at least several quarters ago, but you know with new form factors utilizing both small panel and large panel displays in the second half, what is your view of the display business going forward? Thank you..

The display is obviously not running at the levels that was before, but it’s, you know there are still some activity in OLED and there is obviously continued investment in Gen 10.5 tools and then as the TV sizes expand, so we're seeing the activity, we're seeing kind of spread between the – as you mentioned the smaller panel size and the OLED, and the very large tools that are making the large TVs.

And so, going forward, I think we used to reach our levels, pre-displays expansions, you know we used to see 3 million to 5 million a quarter from display. During the last few years, we are kind of bouncing around 8 million to 15 million in our – or bouncing around the lower end of that range right now.

And that’s kind of where we see it going forward..

Right, thank you..

Our next question comes from Christian Schwab from Craig-Hallum Capital Group. Please go ahead with your question..

Hi, thanks for taking my question. Great start to the year.

And I know with the caveat of limited visibility, but would you expect the second half of the calendar year to be better than the first half?.

Yes. You know for planning purposes we are assuming that the whole year is roughly bouncing around these levels. I think we have more optimism than pessimism for the second half, but our base assumptions are that it will continue to see this level of business through 2019..

Perfect.

And then just what type of margin improvement should we expect first half versus the second half that you guys highlighted?.

I think the key thing, Christian that we talked about in our previous calls is some of the cost reductions, I think we had mentioned that we would be at a run rate by the end of the year at 15 million to 20 million of cost coming out. So, that will definitely help some of the margins that we’re seeing and seeing the improvement in the second half.

Obviously, it depends on timing of everything, as well as execution of some of the cost initiatives we’re doing, but we do see that they are going to ramp up a little bit in the second half and as compared to the first half..

Okay, that's great, no other questions. Thank you..

Thanks, Christian..

[Operator Instructions] Our next question comes from David Duley from Steelhead Securities. Please go ahead to question..

Thanks for taking my questions.

Just as far as the Q2 goes, how should the two pieces of your business act in Q2 versus Q1?.

From a breakdown of revenue, it’s fairly similar as compared to this quarter. Very similar percentages..

Okay.

And then you mentioned as you have no [indiscernible] goes us, do you have any examples of how much more intense node to node it might be or how much more of a revenue opportunity that might be as you see shrinks from your large customers?.

Obviously, there is a mis in what’s going on. We’re seeing activity across all the notes. As far as the [indiscernible] there is so many different platforms and so many different applications for each platform.

I don't think we could break out the frequency of clean, obviously, the trend is up and it’s part of why we, I guess it’s factored in why we believe that industry, why our services business will grow in the mid-to-high single digits, it’s a combination of the wafer starts going up from the investments from the last year, as well as I think the factor of the increased frequency at the leading edge node.

It is difficult to break out how much of that is due to the increased frequency, but I would guess it’s roughly half of the impact of the service business growth..

Okay, great.

And did you have any 10% customers during the quarter?.

Oh yes. At least two..

The typical that we have in most quarters continue to be, so the two highest customers that we typically put into our 10-K or continue to be Lam and Applied..

And you don't breakout that on a quarterly basis, the percentages, I just don't recall, I'm sorry..

Okay, no worries. Generally, the Lam is around 40% and Applied is close to 21..

Okay.

And then just, Jim if you could just speculate on what you think the overall or – for planning purposes let's say, what is the WFE number that you're planning for as far as the decline on an annual basis this year?.

So, low 40s or roughly about 20% drop from 2018..

And when you compare that to your core revenue it starts to assume that your core revenue would drop a little bit more just because WFE, overall WFE is held by [lithography] and the services business of your large OEMs.

So, if they dropped 20% what will we think your core business might drop?.

That’s actually attracting pretty close. You know, we do have, although it’s not in our top 10, we do have our footprint in the litho space as well.

I think the bigger impact in the first few quarters was the inventory in the chain, all the way down through the chain between us and our customers and our customers and their customers and so on and so forth. So, I – but I think overall, if you do the math, we are relatively in-line with the overall WFE..

Alright, thank you..

Thank you..

Thank you..

And ladies and gentlemen that will conclude our question-and-answer session. I’d like to turn the conference call over to management for any closing remarks..

Well, thank you for joining us, and we look forward to speaking to you on the next quarterly call..

And ladies and gentlemen, with that, we’ll conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines..