Good afternoon everyone, and welcome to the Ultra Clean Technology Fourth Quarter and Full Year 2019 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Rhonda Bennetto, Investor Relations. 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 up 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 disclosure in our SEC public 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..

Thank you, Rhonda. And welcome everyone to our fourth quarter and full year 2019 conference call and webcast. I will start with some operational and financial highlights from 2019 in the fourth quarter. Then provide an update on the China health situation.

I’ll conclude with our outlook for the near and long-term semi market as they relate to UCT and then turn the call over to Sheri for a financial review before opening up the call for questions.

UCT had a busy and productive 2019, delivering strong operational and financial performance as the industry transitioned from positive leading indicators to elevated demand.

We executed on a series of rigorous cost improvement initiatives that optimize our product footprint and increase profitability while maintaining our capacity to react quickly as the industry ramped.

We made a strategic, accretive acquisition in the first half that expanded our share and gas delivery involvement, diversified our customer base and increased our share in key semiconductor equipment commodities.

These initiatives bolstered by our recurring service revenue stream resulted in our highest gross margin to date, greater profitability and record cash generation against a challenging backdrop. In addition, we made some important strategic hires with key capabilities and experience to supplement our growth plan.

This restructuring supported by a strengthened financial profile enabled us to meet the challenges of the steep and sudden increase in demand we saw heading into the year end. UCT is now a larger, leaner, financially stronger company executing at a very high level and we are looking forward to capitalizing under opportunities we see ahead.

Before I move on to our short and longer-term outlook, I would like to comment on the various serious public health issues facing China and other regions. First and foremost, our primary concern is with the health and well-being of all affected by the situation.

Under the direction of our business continuity team, we are ensuring that we are following the recommended precaution and are implementing appropriate measures within our global business operation to ensure the health and safety of our workforce.

Due to increased demand, we were already running partial production during the Chinese New Year period in our Shanghai factory, which aided in our return to operations on February 10th at the end of the government imposed 10-day shutdown.

We are currently back to approximately 60% of capacity in our Shanghai factory and expect to be at about 85% by month end. We are working diligently to mitigate the impact of the disruption of our business in this factory and other factories which are impacted by the global nature of the supply chain.

While we are working very closely with our supplier, sub-suppliers and customers to minimize disruption as we all continue to respond to the situation, there is a likelihood that some deliveries could move into the second quarter. And this is a situation with limited visibility, we will provide material updates as we move through the quarter.

In the short-term we are energized by the opportunities we see this year. The semi industry continues to gain momentum and all indications point towards a healthy year for the industry, our customers and UCT.

Increased CapEx spending is supporting strong demand for industry leading 7 and 5 nanometer technologies across multiple platforms relating to 5G and artificial intelligence. In the memory market, we are seeing a step up in memory investments and improvements in memory chip pricing.

By closely partnering with our customers, we are strategically aligned to benefit from the advancement of their roadmap.

Over the long term, we expect the explosion of data generation and new approaches to computing will sustainably create value as the electronics industry races to provide leading edge capability across a broad range of semiconductor application.

Working in close partnership with our customers to accelerate the time to market, for their advancing technologies, UCT is delivering on it’s mission, strategy and objective. With that, I'd like to turn the call over to Sheri for a Financial Review and Outlook.

Sheri?.

Thanks Jim and good afternoon everyone. Thanks for joining us. In today's discussion, I will be referring to non-GAAP numbers only. UCT demonstrated strong financial performance through the most recent industry cycle. Total revenues for the year was $1.07 billion, flat with 2018.

This compares to a decline in the mid-teens and WFE [ph] spend in our primary segment. Accelerating demand throughout 2019, together with our cost reduction initiatives resulted in a 140 basis point improvement in gross margin, and 160 basis point improvement in operating margin since the beginning of the year.

We generated a record $121 million in cash from operations and reduced our long term debt by $50 million significantly improving our leverage. By a number of measures, the fourth quarter was especially noteworthy for UTC as demand continued to accelerate on improving market conditions.

We've exceeded our expectations in revenue and EPS, improved gross margin and operating margins, and generated significant cash from operations.

A pickup in equipment demand, so our products division grew revenue by 15.1% coming in at $230.2 million and our services division contributed $56.2 million up 3.5% over the prior quarter as wafer fab utilization began to return to normalized run rates.

Higher volumes, together with the realization of our cost structure improvements brought total gross margin to 20.1% up from 19.2% in the previous quarter. Our services gross margin was 36.5% and products were 16%.

As we've shared before, margins can be influenced by customer concentration, geography, product mix and volume, and the timing of our restructuring initiatives. So you should expect to see variances quarter-to-quarter. Operating expenses of $34.2 million were flat compared to the prior quarter, despite the increase in revenue.

As a percentage of revenue, OpEx decreased to 12% from 13.4% last quarter. Total operating margin for the fourth quarter was 8.1% compared to 5.8% in the previous quarter. Margin contributed from the services was 14.3% compared to 9.8% last quarter, and products contributed 6.6% versus 4.6% in the prior quarter.

Based on 40.5 million shares outstanding, earnings per share for the quarter improved from $0.21 per share in Q3 to $0.33 per share derived from net income of $13.2 million. Excluding stock based compensation, EPS was $0.40 for the quarter compared to $0.28 last quarter.

Beginning with the Q1, 2020 we will be reporting non-GAAP EPS excluding stock-based compensation. Our tax rate for the quarter was 20.8% compared to 23% last quarter, primarily due to favorable exchange rate movement.

Turning to the balance sheet, cash from operations was $31.9 million and we ended the quarter with $162.5 million in cash and cash equivalents. During the quarter, we made additional voluntary loan payments of $19.1 million. This brings our current net leverage down to a favorable 1.36.

Our strong balance sheet gives us confidence that we can meet customer demand as the market continues it’s upward trajectory.

Against an improving backdrop of increased demand and risk adjusted for the current China situation, we are projecting total revenue for the first quarter of between $290 million and $320 million and EPS in the range of $0.40 to $0.52 excluding stock-based compensation. And with that, I'd like to turn the call over to the operator for questions..

[Operator instructions] The first question comes from Quinn Bolton of Needham & Company, please go ahead..

Hey Jim, Sheri and Rhonda congratulations on the record gross margins and strong cash flow in the quarter. I guess, starting off with obviously the short term impact for the coronavirus.

Wondering if you guys could say how much of the March quarter guidance you may have taken to account for the coronavirus risk and the possibility that some shipments slipped from Q1 into Q2 and then I've got a couple of follow ups. Thanks..

Yes, Hi Quinn. We have approximately -- we are estimating about 5% to 10% of revenue shifting into Q2. At this point we don't see any orders disappearing at their office, most likely shifting into the quarter, the second quarter due to constraints in the supply chain..

Got it. Thank you.

And then, just kind of a sort of a longer term picture or maybe just as you think about the year 2020, you know sort of a lot of moving parts we've got I think foundry logic appears to be front half loaded, you talked about memory picking up, it felt like that might be more back half loaded and then obviously the short term effect from coronavirus.

How would you encourage us to think about the linearity or sort of the trajectory of revenue over the course of the year? Can you grow sequentially? Is the front half loaded, back half loaded? How do you think we should be thinking about the revenue pattern as you see it today?.

Yes. As you stated, a lot of moving parts and in the recent -- a few more moving parts showed up. I think in short, yes I think, we saw, we had experienced what our customers had called the steepest ramp and that they'd ever seen, not the highest ramp to the highest level, but in the end of last year, it was the steepest ramp.

And so, we were kind of expecting that there was a good possibility for memory to start kicking into the second half as we saw the fundamentals improve and another kind of step up there. I think at this point, it's really hard to -- it's even more difficult to tell what's going to happen there.

And in the short term, there's that impact all the way down the line from coronavirus. You know there's China demand obviously is going to be impacted for end devices as well as a lot of the supply for electronics are made in China. So it could be a supply issue and a demand issue on the way downstream.

Obviously, some fab utilizations are going to drop in China in the short term, who knows how short or how long, but Smick [ph] and YMTC are two customers that have been taking equipment and ramping that are going to be affected in the short term.

You know and then obviously there's those delays and possibly some hesitation that will happen by the larger players like TSMC and Samsung on exactly the timing of when they would have made their memory investment. So there might -- there could potentially be some more wait and see.

So we’ll be anticipating a good possibility for a memory to really kick in, in the second half of the year. It could end up being more of a wait-and-see as they see how these things ripple through, or it could -- it could continue to happen according to our expectations. It's really difficult to tell.

But I think if you think of the shape of it, I think we were expecting you know two sharp step up, and then obviously usually there's an over -- there's a correction a year down the road. So it might possibly look something like a more smoother ramp up with less of a correction in the outer you know a year and a half, two years from now.

So it might be, I guess I would think the shape kind of flatten out a little bit more, but maybe more of a smoother ride through this ramp rather than the sharp up and down..

Great. Thanks for that color. And then just lastly you mentioned, in the Quantum business some of the fab utilization rates getting back to more normal levels. Obviously you talked about some of the near-term impact you're likely to see in some of the China fab utilization rates.

But wondering, if you could look across your other logic and memory customers, are you seeing still increasing utilization rates? How do you how do you see utilizations kind of trending into kind of Q1, Q2?.

Yes. Logic continues to be strong and pretty much unaffected by the coronavirus. Memory in Korea has been ramping up.

It didn't come up all the way by the end of the quarter in Q4 that we anticipated, but it’s definitely been increasing and a good trajectory up, and we expected that now to continue back to -- we expected full utilization by the end of the quarter. It looks like it might be a month or two behind.

And the utilizations in China are obviously going to be impacted. But our footprint for that business in China is relatively small. So, you won't see much of an impact for UCT on that front..

Great. Thank you..

The next question comes from Patrick Ho of Stifel. Please go ahead..

Hi. Good afternoon. This is Brian calling in for Patrick. Congratulations on the execution in the quarter. A couple of questions here. I guess just to sort of pin down the first, Jim, the 1Q outlook.

Am I right in sort of extrapolating that relative to the constraints you're seeing in the quarter, the SPS business maybe have up sort of high single digit sequential.

And then, maybe the SSD sort of up low single-digit sequential?.

Yes. That sounds about right. I think, obviously it would have been -- SPS would have been higher without some of the supply chain pushes into the second quarter. But that sounds about right..

Got it.

But like the native demand sounds like sort of maybe up mid-teen-ish sequential would have been the native demand?.

Yes. That sounds right..

Okay, great. And in terms of also maybe pulling share in.

In terms of the influences on gross margin do you expect some downward influences potentially as you look to maybe expedite late in the quarter and the other sorts of complexity that are involved here in terms of just the challenges that you're facing in this current quarter?.

That's always kind of part of our business in general. We have a lot of drop in orders that happened often and we have a lot of expediting that occurs so that we meet customer demand. So it’s kind of similar to what we normally have happened.

So I don't see it being extraordinary at this point for Q1 in order for us to meet the demand necessary for our customers. So it’s kind of a standard practice for us to have to expedite, make sure that we get our material in on time..

Got it.

So it’s kind of a neutral impact in terms of the gross margins quarter to quarter?.

Yes..

Okay..

From right now I guess..

Got it. And maybe turning back to SSD, another question there. On a sequential growth kind of trajectory at the moment here for last couple of quarters. I think still down little bit year-on-year. And Jim you reference how, you see memory utilization in some key parts of the globe starting to come back and maybe get back to more fully loading.

As we kind of cross back over to deposit growth and maybe you expect to happen in the first year. What kind of growth do you think we could return to this year? I know, it’s kind of hard, but that tend to be steadier business that doesn't usually contract too often.

So just kind of curious with what your perspective on that is?.

Yes. Typically without acquisition that business should grow in the mid to high single digit percentages. 2019 was a strange year with fab utilization in memory having a hole in the middle of the year.

But all other things being considered assuming no long-term impact from what's happening with in China with the coronavirus, you know typically that business should grow 5% to 10% a year..

Great. That's helpful. Thank you..

The next question comes from Karl Ackerman of Cohen & Company. Please go ahead..

Hey, good afternoon, Jim and Sheri. Your larger customers have already given much qualitative guidance on semi-cap spending this year of being up to 10% to 15%. In each of your top two customers, expect to outgrow the market.

I know you don't really guide for the full year, but how important is your customer diversification and new program wins to achieve that low double digit growth versus elevated industry spending?.

Yes. I think we are still strongly correlate with the large -- our major two customers. I think together there's still about half of our revenue. So there's a very strong correlation there. We have some pretty nice success on project wins and some of the new accounts.

And as we stated on the last call, our goal over the next few years is to add one to two more reportable customers that are 10% or higher. So those are doing pretty well, but obviously higher growth but on a smaller number.

I believe we could do -- many of those estimates you talked about came out before the full understanding or impact of coronavirus as well-known. So I think some of those -- those estimates are going to obviously have to be continue to be looked at. But I would still expect that we could grow roughly along the same lines as our two major customers..

Appreciate that, Jim. Maybe shifting gears to profitability. I was hoping if you could discuss your gross margin leverage from here. Specifically, what looks to be in accelerating services business. Some of your fixed and variable costs actions to-date soon to be taking effect.

And then, whether or not a memory recovery would have any mix benefits for you if that were to occur later on this year?.

Maybe I'll start and let Sheri add some color. Yes. Think of how we've kind of bucketed our performance in different revenue ranges. We're at the higher end of our expectation of margins of where our model is. Everything varies from quarter to quarter. I think a lot of the leverage has been played out.

And I think at this point, I wouldn't expect -- I expect -- we saw a lot of follow through can happen as we went from -- went up double digit growth. And so I think there'll be some continued improvement there hopefully. But we're already kind of operating at the high end. And so obviously, the fruit is little bit higher up on the tree..

Yes. So Karl, from a gross margin perspective, I mean, obviously volume is going to be the key factor for 2020 especially being at 20% gross margin is a higher end of our range with our new model that we put out in our corporate presentation on the website today.

So, I think the key thing there is really the volume play coming in and obviously making sure that our cost structure stays in alignment with our -- with the revenue growth that we potentially see. So, it’s just a matter of watching that closely and hopefully having the similar fall through that we've seen in the past as we've gone up in the cycle..

Great. Appreciate that. Thank you..

The next question comes from Tyler Burmeister of Craig-Hallum. Please go ahead..

Hey, guys. Thanks for letting me ask the question. So most of my questions have been answered. I want to circle back to memory. It sounds like memory, you'd agree to kind of more of a second half way of thing and possibly more even 2021 event.

I'm just wondering if those increases in memory spending are still mostly technology transition driven or if you're going to start to see some capacity additions as well there?.

Yes. Well, obviously, it’s a combination of the two, but it's definitely a technology node for them moving down. I think the Samsung investment going in the Pantech fab is a big one and that's really going to move the needle when that fab, where the shells already is built out. Where that investment will happen. And I think that's obviously both.

That's a capacity play and the next-generation DRAM device.

So as the prices of DRAM have been improving and capacity adds are been very discipline and demand has continued to increase, I think it’s going to play a dual role of bringing to the next node as well as there's going to be capacity in memory that's going to be required soon dependent just may move one way or another, depending on some of the short-term impact that we're seeing..

All right. That's great. That's all from me, guys. Thanks..

Thank you..

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

Thank you. Appreciate you joining our call and we look forward to talking to you next quarter..

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