Good day, and welcome to the Ultra Clean Q3 2023 Earnings Call and Webcast. All participants will be in listen-only mode. [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 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?.

Thank you, Rhonda. Total revenue for the third quarter came in as expected, increasing 3% over the second quarter. Our product business grew just over 5% as some WFE fundamental dynamics began to show small signs of improvement.

We believe that some progress has been made for equipment inventory reduction throughout the system and expect several more quarters until normal levels are achieved.

We are aligned with our customers and their customers that while we don't know the pace or the timing of the recovery, we believe the fundamentals are slowly setting the stage for the industry to return to growth.

Our typically high-margin service business saw an abrupt decline in revenue due to a sudden and unexpected large reduction in wafer starts at a primary customer.

While this pullback had a detrimental effect on our overall profitability and earnings, we believe that production cuts should help rebalance of supply and demand and a recovery of chip prices.

For the foreseeable future, we will continue to focus on optimizing our global footprint, driving operational efficiencies, and other strategic initiatives to further increase our value for our customers. These efforts will lay the foundation required to capitalize on share gain opportunities heading into the next ramp.

We are in a strong position to increase our semi manufacturing leadership position with the available capacity and geographic flexibility to meet accelerated demand when it returns. Along those lines, we are very pleased to report that we have acquired HIS Innovations Group.

They provide design, manufacturing, integration of components process solutions, and fully integrated subsystems to the semiconductor subfab segment.

This acquisition adds a higher gross margin and value product offering, increases our vertical capabilities and synergies, extends our reach into the subfab area, and expands our addressable market by approximately $1.5 billion.

With over 60 fabs under construction globally, this acquisition aligns with our long-term strategy to pursue sustained and profitable growth and will be rolled into our product division. Lastly, we are deeply saddened and concerned by the current events in the Middle East.

We are taking the situation very seriously and I'm relieved to say that all our employees are accounted for and we're doing all we can to assist with their safety and well-being. Both of our facilities in Israel are running at the capacity required to meet production targets. Our commitment to support our customers worldwide remains a priority.

Israel's policy ensures business continuity across the industrial segment, some ports and airports are currently functioning, and we can ship and receive the products and raw materials required to meet customer demand.

We're also working together with other multinational companies that have substantial operations in Israel to ensure we are aligned and supporting each other. Overall, we are navigating through the demand variability in the current environment.

Longer term, our increased scale, operational efficiencies, expanded capacity, and new capabilities position us well to maintain our leadership position and outperform the industry. And with that, I will turn the call over to Sheri..

Thanks Jim and good afternoon everyone. Thanks for joining us. In today's discussion, I will be referring to non-GAAP numbers only. As Jim noted, our products business performed well from a revenue standpoint in the third quarter.

Our services business, however, was impacted by a sudden larger-than-expected reduction in wafer starts in Q3 and that impacted our overall profitability and earnings. Total revenue for the third quarter was $435 million compared to $421.5 million in the prior quarter.

Revenue from products increased 5.1% to $380.9 million compared to $362.5 million last quarter. Services revenue was $54.1 million compared to $59 million in Q2 due to the scale back and wafer starts as I just mentioned. Total gross margin for the third quarter was 15.5% compared to 16.7% last quarter.

Although product revenue grew sequentially, gross margin came in at 13.8% compared to 14.5% in the prior quarter and services was 27.4% compared to 30.3% in Q2. The reduction in margin was due to lower volumes for service and overall mix within each business unit.

We continue to focus on cost improvements and operational efficiencies to strengthen profitability. Operating expenses for the quarter was $48.6 million compared with $49.4 million in Q2 and decreased as a percentage of revenue to 11.2% from 11.7%. Total operating margin for the quarter was 4.4% compared to 5% in the second quarter.

Margins from our Products division was 4.5% compared to 4.3% in the prior quarter and services margin was 3.7% compared to 9.3% in the prior quarter. The drop in services margin was due to lower volumes and mix.

Based on 45 million shares outstanding, earnings per share for the quarter was $0.04 on net income of $2 million compared to $0.16 on net income of $7.1 million in the prior quarter. Our tax rate for the quarter was 37.3% due to a shift in profits by geography.

Our tax rate was trued up in Q3 for year-to-date expense and we expect our tax rate for Q4 and 2023 to be approximately 20%. Turning to the balance sheet, our cash and cash equivalents were $342 million, an increase of $21.2 million over Q2. Cash from operations was $36.2 million, similar to last quarter at $36.4 million.

As we navigate through the current cycle, we will continue to manage our working capital. Given macroeconomic and geopolitical uncertainty and current industry dynamics, we are keeping our guidance range wide. With the addition of HIS Innovations Group, we project total revenue for the fourth quarter of 2023 between $420 million and $470 million.

We expect EPS in the range of $0.02 to $0.22. This includes approximately $10 million of revenue and $0.01 of EPS for two months of operations from the acquisition. And with that, I'd like to turn the call over to the operator for questions..

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Krish Sankar with TD Cowen. Please go ahead..

Hi. This is Robert Mertens on behalf of Krish. Let's see first just in terms of the service sales this quarter. I know they're a bit weaker on utilization rates last quarter, and you mentioned the sudden reduction of wafer starts impacting in September.

Was there -- the main qualifier for this quarter? Or was there anything else in maybe just in terms of the mix that goes into the service division, if you've ever broken that down..

Yes, hi Robert. The first part, we have seen reductions in wafer starts across the broad spectrum of fabs prior to this last quarter. What we saw early in the third quarter was one particular chipmaker, ratchet down mostly their memory fab pretty dramatically.

They've been holding that up for half the time when others had already brought their utilizations down. So, that was -- I guess, you'd say, the last month will really fall. So, that was the main impact there. As far as your second question around the mix, I think maybe my answer on the first might answer that.

But service is typically more dependent on logic than memory, but this is a rather large memory fab and had an outsized impact..

Great. Thank you. And then maybe just real quick in terms of the timing of seeing the ramp down of that one customer is there any indication of maybe when the sales would pick back up. Is that something you think services would be growing next quarter or something more into calendar year 2024? Thanks..

Yes, really difficult to predict. We're starting to see some of the fundamentals of supply and demand of these chips start to move towards a better balance. We start to see some ASP on some of these chips start to recover a bit.

So, things are moving in the right direction, but as far as when the customers will start ramping up the supply side of the chips and use their utilization is up, it's still unclear. But I would say it's doubtful to see anything meaningful within this year..

Great. Thank you. That’s helpful..

[Operator Instructions] At this time, we're showing no more questions. This concludes our question-and-answer session. I would like to turn the conference over to Jim Scholhamer for any closing remarks..

Thank you all for joining us today and we look forward to speaking to you again next quarter..

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