Good afternoon, ladies and gentlemen, and welcome to the Ultra Clean Technology Q2 2024 Earnings Call and Webcast. 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 Thursday, July 25, 2024.

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. And 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'll turn the call over to Jim.

Jim?.

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 second quarter. Then share some thoughts on the broader industry trends we are seeing.

I'll close by highlighting another important award before turning the call over to Sheri for a more inclusive financial review before opening the call up for questions. We continue to perform well in 2024 with second quarter revenue and earnings at the high end of our guided range.

We saw strength in both products and services across all geographies and, in particular, elevated equipment spending within the domestic China market and customers supplying high bandwidth memory and equipment supporting advanced packaging for AI applications.

Over the past several years, we have expanded and diversified our content, broadening the applications and platforms where we participate, providing us with a unique competitive edge to engage in all stages of industry growth, from fab construction through equipment buildup and supporting the install base.

Our broad engagement in the semiconductor ecosystem and our technical and operational capability has enabled us to participate in some of the early AI hotspots that are front-running the next wave of AI innovation. AI servers and AI-enabled devices are experiencing elevated demand, leading to increased investment supporting capacity expansion.

This surge requires high performance chips for data center training and other leading edge chips, creating a cycle where AI computing requirements drives semiconductor content growth, spurring further industry investment throughout the whole ecosystem.

We believe AI will be the most significant technological breakthrough of our era, with some of the world's most advanced chips at its core.

UCT is uniquely positioned to capitalize on this technology migration by driving earlier, deeper, and broader collaboration with our customers as they move towards high volume production, particularly at the leading edge.

Other metrics pointing to an industry recovery that we are tracking closely include further rebalancing of inventories, increased shipments of high performance computing chips, favorable memory pricing adjustments, elevated data center demand, and a meaningful increase in installed wafer fab capacity.

The order and speed at which these segments rally will be uneven for the supply chain. However, we are seeing signs of momentum now that indicate a recovery could start later this year instead of early 2025.

Our internal marketing intelligence is aligned with the industry belief that wafer fab equipment sales should grow by at least mid-teens next year, driven by increasing demand for leading-edge technology, the introduction of new device architectures, and increased capacity expansion purchases, all of which UCT supports in one manner or another.

Our expanded suite of offerings and global footprint position us well to, again, outperform the markets in the next upturn. Our site optimization strategy, including automation and other efficiencies, is on track. Part of that plan, to shift some production to lower cost regions, remains a priority.

And it's worth noting that revenue from our Malaysia facility has doubled from the fourth quarter as we focus on qualifications and ramping that flagship site in advance of the ramp.

The investments we have made in capacity expansion and operational efficiency support our customers' innovation roadmap and manufacturing of their next generation technologies.

Lastly, I am very happy to announce that, in addition to the Intel and Texas Instrument Awards of excellence we received last quarter, we were the proud recipients of the Outstanding Partner Award from Piotech China last month.

We started our operations in China 20 years ago and have grown to over 700 dedicated employees who continue to drive our success today. We are honored by this recognition and are thankful for Piotech's continued confidence in us.

As our list of accomplishments continue to grow, I want to thank all our employees around the world who are executing at a very high level to ensure we are meeting current demand and preparing for the next up cycle.

Our ability to persevere has been instrumental in driving customer success and maintaining our position as the leading manufacturer in the industry. In summary, we are capitalizing on some early inflection points in what will be a significant transformation of our industry.

We are performing at a very high level to meet current demand while prudently investing to secure future share gains. And we're ready to meet major increases in demand throughout the next ramp with the available capacity, operational excellence, and quality products and services to ensure our customers' success.

And with that, I'll turn the call over to Sheri for our financial review.

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 mentioned, total company-wide revenue was up quarter-over-quarter across all geographies and major customers, most notably in the domestic China market.

We also saw additional revenue supporting high bandwidth memory and equipment for advanced AI packaging, which put us at the high end of our guided range. Total revenue for the second quarter came in at $516.1 million compared to $477.7 million in the prior quarter.

Revenue from products increased to $452.7 million compared to $418.5 million last quarter. Services revenue was $63.4 million compared to $59.2 million in Q1. Total gross margin for the second quarter came in at 17.7% compared to 17.9% last quarter. Product gross margin was 15.6% compared to 15.8% in the prior quarter.

And services was 32.7% compared to 32.3% in Q1. Margins can be influenced by fluctuations in volume, mix in manufacturing region, as well as material and transportation costs. So there will be variances quarter to quarter. Operating expense for the quarter was $55.8 million compared with $54.5 million in Q1.

As a percentage of revenue, operating expense decreased to 10.8% compared to 11.4% in Q1. Total operating margin for the quarter increased to 6.9% compared to 6.5% in the first quarter. Margin from our product division was 6.2% compared to 6% in Q1 and services margin was 11.8% compared to 10.1% in the prior quarter.

Operating margin improvements were largely different by holding OpEx relatively flat on higher revenue. Based on 45.4 million shares outstanding, earnings per share for the quarter were $0.32 on net income of $14.4 million compared to $0.27 on net income of $12.1 million in the prior quarter due to increased volumes.

Our tax rate increased from 19.7% last quarter to 24.7% this quarter, representing a year-to-date effective tax rate of 22.5%. Given the growth we've experienced in higher tax jurisdictions like China and the Czech Republic, we now expect our tax rate for 2024 to be in the low 20s.

Turning to the balance sheet, our cash and cash equivalents were $319.5 million compared to $293 million in Q1. Cash flow from operations was $23.2 million compared to $9.8 million last quarter, driven by improved operating results and timing of payments. For the third quarter, we project total revenue between $490 million and $540 million.

We expect EPS in the range of $0.22 to $0.42. And with that, I'd like to turn the call over to the operator for questions..

[Operator Instructions]. Your first question comes from the line of Krish Sankar from TD Cowen..

I had a couple of them.

Jim or Sheri, first one, on the domestic China strength that you saw, is it still kind of low-single-digits of revenue? So do you expect that to continue increasing as we go forward?.

It used to be low-single-digits, but now we're looking at $40 million to $50 million of order coming out of that site for those customers..

And these are the domestic China semi-cap companies, right?.

Correct..

And then, the strength in HBM, is that mainly you're seeing on the plating side or how do you get the color into where the end application is?.

Definitely, plating is the biggest piece, but we've also seen it trickle through in other applications like ALD and other areas..

And my final question, Jim, where are your cycle times and lead times today compared to like three months ago? Are they still the same?.

I'm sorry, Krish, can you repeat that?.

Where are your cycle times today or your lead times today for shipping these [indiscernible] (00:11:40) boxes?.

Basically, right after they order it. Cycle times are very short these days..

So that hasn't changed, right? So it's kind of pretty much….

No. No, it hasn't. Obviously, there's still a lot of inventory in the pipeline, but it's all the way back through the supply chain. So, part of what makes us special is our ability to turn things around really quickly as well. And so, that's what's really been an enabler for us to take advantage of some of these things..

And your next question comes from the line of Charles Shi from Needham..

Congrats on the consistent execution. I'm glad to see the total revenue retaking that $500 million. Well, we haven't seen that since, I guess, fourth quarter 2022, right? But I want to follow up a few things that Krish just asked.

First thing about China, I know that you talk about China, that's your direct China exposure somewhere around 10%, sounds like.

Going into the second half of this year, how is that business going to trend? Do you see more consistent half-over-half growth or any chance to see any inflection, maybe level off, start to decline? What's the scenario there, what you're seeing in the China business from this point and forward?.

As I said last quarter, we expect this high level of business to continue in China through the rest of the year. And it's really been a huge benefit for us to have this unusual footprint that we have in China that most suppliers do not have, but we do not see it really, really tailing off. But I don't think that's the whole story.

We're also seeing strength in other parts of our diversified business. It's really helping us kind of move forward. So when you think about detractors or what might degrade, we're not looking at that. I think we're looking at things pretty much saying how they are and we're looking more at potential upside to certain areas as we go forward..

I know that the core part of the UCT business, obviously, still with the Lam, with Applied, other – ASML, those kinds of suppliers. So maybe one more follow-up, the HBM, advanced packaging side, I'm going to ask the question in a similar fashion. So it has been an upside contributor. to your numbers last quarter and once again this quarter.

The obvious question is how much more upside do you see from either plating and some of the broadened out opportunities like ALD, for going into the AI related packaging, will still be there in second half or do you expect that you're going to stay at this level for those kind of business through the rest of the year? Or any upside for next year and anything that you can tell us about this part of the business would be helpful..

We definitely see the levels that we're operating at. For example, one of our factories, which is one of the major contributors to the wet systems that do a lot of the interconnect layers, is at a level three to four times higher than it was a few years ago. And we see that continuing through this year.

And if you're watching what's going on in the chip market and where things are going, I think we only see upside into next year..

Only see upside. This is what we want to hear as well. It does seem like your revenue numbers from Lam, from Applied, that's in your PowerPoint – I know this doesn't include some of the OEM related to service revenue there, but it seems like your top two customers are already buying a little bit more in Q2 than in Q1.

Seems like some sign of growth there. But going back to what you said in your prepare remarks about the WFE, sounds like you are thinking maybe Q4, you should see a little bit of more pickup in the general market. Because the only reason I ask this is that you did guide Q3 to be flat relative to Q2, but sounds like Q4 expecting some pickup..

Yes, I think we are seeing early indications that Q4, in a broader area, could be better for sure. And of course, we remain ready. We've done a lot of work to get – I think anyone who's been in this industry for a long time knows that when the gas gets hit, it goes up fast, it goes up hard.

So we've done a lot of work to bring up our capacity, to take advantage of when it starts to go. So what are we seeing in Q4? We're seeing early signs of some broader improvement, but yet still slight, but we all – I think many of us know that when it does come, it comes fast.

So we're very encouraged by the fact that we're seeing some bottoms up, small improvements in the fourth quarter, and we're kind of anticipating what that might turn into..

Maybe lastly from me, I do want to ask you about your litho business. I kind of recall that you said the customer used to have a little bit more aggressive build plan, but that they walked that back. And it has been rather stable, consistent.

But do you see any sign of pickup for the litho business yet?.

So maybe I break that into two parts. I think litho – and maybe I can flip that over to Cheryl Knepfler, our marketing expertise, what she sees for the whole litho market. But what we have been talking about, UCT in particular, we have made nice share gains in the new equipment going out.

So what we are seeing is, as the new equipment and our contribution to that, we are seeing that uptick through the third and the fourth quarter for us, in particular. But as far as the whole litho market in general, maybe I would turn it over to Cheryl to talk a little bit more deeper about that..

As we look overall, we know that DRAM is expanding their litho. The timing is coming in as they're qualifying and as different processes are coming in. So we are seeing that being a little bit dynamic and are seeing things slowly translate into more firm orders going forward. So we do expect that to be a solid business for us going forward..

And your next question comes in the line of Christian Schwab from Craig-Hallum Capital Group..

Great quarter, guys. So the 15% mid-teens type of WFE growth that you're looking for, as well as other third-party experts who get paid to make those type of expectations are also in line with that.

But given the fact that the WFE then would be north of $110 billion a year, is there any reason should that play out exactly that way that you wouldn't be approaching 2022, your previous 2022 revenue type of numbers potentially in 2025 or do you think there was some over ordering that you want to see a little bit more clarity before suggesting that could be the case?.

If the market does go up like we think – we've already been in two years of the doldrums, right, since November of 2022. Not every segment of WFE, but the majority of segments.

We do see that kind of broad growth in WFE in 2025 and also we have always traditionally outgrown that growth by a significant margin, absolutely, I have a lot of confidence that we could meet and potentially significantly exceed the numbers that we had in 2022..

Thank you. That concludes our question-and-answer session for today. I will now hand the call back to Mr. Jim Scholhamer for closing remarks..

So thank you, everyone, for joining us today. And we look forward to speaking with you again for our next quarter conference call. Thank you..

This concludes today's conference call. Thank you for participating. You may all disconnect..