Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Ultra Clean Holdings Inc  (NASDAQ:UCTT)
Q1 2019 Earnings Call
May. 02, 2019, 4:45 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to the Ultra Clean Technology 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 questions. (Operator Instructions) Please also note today's event is being recorded.

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

Rhonda Bennetto -- Vice President Investor Relations

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 we 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 are subject to risks and uncertainties. For more information, please refer to 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-GAAP 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 29th; and the Cowen Annual Technology Conference on May 30th in New York. In addition, we will be presenting and livecasting, the Stifel Cross Sector Insight Conference on June 11th in Boston, and you can find additional information on these conferences on our website www.uct.com/investors/events.

And with that I'll turn the call over to Jim. Jim?

Jim Scholhamer -- Chief Executive Officer

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 then Sheri will expand on in her commentary. I'll continue with review of our semiconductor 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 question.

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 product group executed on drop in and pull in 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 customers orders is limited and can change significantly even within a quarter. Our performance is a key supplier enabled us to deliver last minute orders to meet our customer demand. The increase was 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 is relatively the same from a quarter ago, industry CapEx plan for 2019 remain 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 of broadening our capabilities. Both of 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 the initiatives will take several quarters to finalize with the benefit 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 solution. DMS provides a complete range of weldment solutions primarily to the semi industry and is adjacent to our existing Austin Texas facility. This acquisition is consistent with our strategy to pursue sustained profitable growth in our core semiconductor business. Our complementary technology 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 earning.

We expect the DMS to generate over $5 million in adjusted EBITDA this year and add $0.05 to $0.07 to UCTs non-GAAP EPS. By optimizing our operations to improve profitability and expanding our suite of offerings. We will capitalize on the increases in demand for our products during the next plan.

Now I 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 customer. You'll 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 solutions.

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 steps necessary now to improve our profitability, increase our capability, strengthen our competitive position and deepen our customer engagement 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.

Sheri Savage -- Chief Financial Officer

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 SSP. We have provided a reconciliation of GAAP to non-GAAP segmented financial measures and the tables in our press release. Both our products and services divisions perform 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 SSP added $59.8 million.

Non-semiconductor revenue, which includes display generate $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. SSP 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've 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 SSP was 12.8% and SPS was 4.2%.

(Technical Difficulty) audit and accounting fees overtime 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, one of the 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 seven point -- 17.2% last quarter. The increase was primarily due to the quantum acquisition, impact of US tax reform and the changes in the forecasted geographic mix of pre-tax income. Going forward, we expect our tax rate to be in a 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.

Questions and Answers:

Operator

Ladies and gentlemen, at this time we'll begin the question-and-answer session. (Operator Instructions) Our first question today comes from Quinn Bolton from Needham & Company. Please go ahead with your question.

Quinn Bolton -- Needham & Company -- Analyst

Hi Jim, Sheri and Rhonda, congratulations on a nice result -- relative to gain in for the first quarter. Wanted to start with the pull-ins (ph) that you talked about. While I understand it's, kind of, just rescheduling the 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 little bit better, I'm just wondering, if you could talk about where you think some of that strength may be coming from and particularly kind of love to get your opinion on what you're seeing on the logic boundary 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 uptick over the last 90 days?

Jim Scholhamer -- Chief Executive Officer

Yeah. Thanks, Quinn. Yes, it was a combination of Bullen's and as you noted also a drop in orders as well. The majority of the strength, yes, the logic definitely played a key role, but in all chip types the leading edge technology there's still some investments that are happening that are little bit more difficult to predict. So it's definitely a leading edge on all chip types, as well as logic being stronger than expected.

Quinn Bolton -- Needham & Company -- Analyst

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, the process chambers in the field and wondering, is there any part of your business whether it's component to gas panels that might benefit from the old upgrade to (Technical Difficulty) large OEM customers rather than new tool sales or does most of your revenue track new tool shipment?

Jim Scholhamer -- Chief Executive Officer

Great question. No, a lot of the -- with the action if you would is happening on upgrade business as well. And many of the upgrades require either new gas panels or gas panel reconfiguration's and new chamber that require all the same material, roughly as you would in a new tool. 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.

Quinn Bolton -- Needham & Company -- Analyst

I assume that you're seeing that, that sort of that same trend that did in 2019. Upgrade becoming a bigger part of the business.

Jim Scholhamer -- Chief Executive Officer

Yes.

Quinn Bolton -- Needham & Company -- Analyst

Yes. Okay, great. And then just the last question. Wondering you've been 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 overcapacity situation in the industry. Wondering, if you've seen any impact on the memory side of Quantum's business from reduced wafer starts?

Jim Scholhamer -- Chief Executive Officer

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

Quinn Bolton -- Needham & Company -- Analyst

Okay, great. And then just lastly, can you give us what you think the DMS contribution will be for the June quarter, I think in press release when you announced the transaction it was about a $50 million revenue run rate last year obviously, you know, overall demand was better last year. Should we be thinking maybe something in the $10-ish million range?

Sheri Savage -- Chief Financial Officer

Yeah, that 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.

Quinn Bolton -- Needham & Company -- Analyst

Great, OK. Thank you very much.

Sheri Savage -- Chief Financial Officer

Thank you.

Operator

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

Karl Ackerman -- Cowen and Company -- Analyst

Hi, good afternoon, Jim and Sheri. Congrats on closing on DMF. My question is really kind of around outsourcing opportunities. 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 or your non-service business as demand trends have softened and if not do you continue to see the greatest opportunity in the mechanical areas of each tool that (inaudible) wafer transfer across the chamber or are you seeing it pick up at all for gas panels?

Jim Scholhamer -- Chief Executive Officer

Still several questions. I think the first one being an outsourcing opportunity. 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, that obviously abated as the output continued to, it actually went down a bit. So the outsourcing it still occurs on a project by project basis and 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 your question is around where in the systems side of our business, you know, we're seeing activities? Obviously, it hit all areas, but if when as upgrades increase you see a lot more action around the process chamber part of the tool and a lot of the process chambers require gas panels. So we see obviously increased activity in that space.

Karl Ackerman -- Cowen and Company -- Analyst

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 rate today. And do you think that's kind of improved at all over the last, perhaps couple of months?

Jim Scholhamer -- Chief Executive Officer

The visibility is low, and then actually in the last few months it has gotten even more difficult. But I think one of the reasons that our customers view us as go to suppliers, our ability to take a drop in our pull-in and react to that. And that's -- that we call that churn and the churn in the industry especially during a slower period like now tends to be higher than -- and then -- then when the market is moving up the forecast is more stable and further out we've more visibility. So our visibility is lower right now, but we're benefiting from the fact that with our global presence and our big broad capabilities that we're able to -- we're go to supplier for -- the turnaround and lot of those sudden orders.

Karl Ackerman -- Cowen and Company -- Analyst

Understood. My last question, if I may you know one of your -- one of the traditionally AMS providers, you know, ended up buying a more of an OLED -- more of an display type business. And I know your display business does not the upside level 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.

Jim Scholhamer -- Chief Executive Officer

Yes, display is obviously not running at the levels that was before, but it's, you know, there's still some activity in OLED, and there's obviously continued investment in Gen 10.5 tools, and that as the TV sizes expand. So we're seeing the activity, we're seeing it's 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, yes, going forward I think we used to -- we saw levels pre-displays expansion, 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 an hour or bouncing around the lower end of that range right now, and that's, kind of, where we see it going forward.

Karl Ackerman -- Cowen and Company -- Analyst

Great. Thank you.

Operator

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

Christian Schwab -- Craig-Hallum Capital Group -- Analyst

Hey, 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?

Jim Scholhamer -- Chief Executive Officer

Yes. You know our -- for planning purposes, we're 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 continue to see this level of business through 2019.

Christian Schwab -- Craig-Hallum Capital Group -- Analyst

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

Sheri Savage -- Chief Financial Officer

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 with some of the margins that we're seeing, and seeing the improvement in the second half. Obviously just 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 than -- as compared to the first half.

Christian Schwab -- Craig-Hallum Capital Group -- Analyst

Okay. That's great. No other questions. Thank you.

Sheri Savage -- Chief Financial Officer

Thanks.

Jim Scholhamer -- Chief Executive Officer

Thanks, Christian.

Operator

(Operator Instructions) Our next question comes from David Dooley from Steelhead Securities. Please go with your question.

David Dooley -- Steelhead Securities -- Analyst

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?

Sheri Savage -- Chief Financial Officer

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

David Dooley -- Steelhead Securities -- Analyst

Okay. And then you mentioned, as you have no shrinks the intensity of the clean goes up. Is there -- 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 shrink from your large customers?

Jim Scholhamer -- Chief Executive Officer

You know, obviously there's a mix in nodes going on, we feel -- we're seeing an activity across all the nodes as far as the cycle clean, there's 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, I guess, it's factored, you know, why we believe that industry, why our services business will grow in the mid to high single-digits, it's a combination of, you know, the wafer starts going up from the investments from the last year, as well as being the factor of the increased frequency at the leading edge. Now, it's difficult to break out, you know, what 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.

David Dooley -- Steelhead Securities -- Analyst

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

Jim Scholhamer -- Chief Executive Officer

Yes. At least two.

Sheri Savage -- Chief Financial Officer

Yes, so --

Jim Scholhamer -- Chief Executive Officer

As far as I know.

Sheri Savage -- Chief Financial Officer

The typical that we have in most quarters continue to be. So the two highest customers that we typically put into our 10-K are continue to be ramified.

David Dooley -- Steelhead Securities -- Analyst

Yes, and you don't break out that on a quarterly basis the percentages, I just don't recall, I'm sorry.

Sheri Savage -- Chief Financial Officer

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

David Dooley -- Steelhead Securities -- Analyst

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

Jim Scholhamer -- Chief Executive Officer

So low-40, so roughly about a 20% drop from 2018.

David Dooley -- Steelhead Securities -- Analyst

And would you compare that to your core revenue. It start to assume that your core revenue would drop a little bit more just because WFEs -- overall WFEs helped by EUV lithography and the services businesses of your large OEMs. So if they drop 20%, what we think your core business might drop?

Jim Scholhamer -- Chief Executive Officer

That's actually tracking pretty close, we do have although it's not in our top 10, we do have a footprint in -- with those space as well. I think the bigger impact in the first few quarters was the inventory and 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, you know, if you do the math, you know, we're relatively in line with the overall WFE.

David Dooley -- Steelhead Securities -- Analyst

Alright. Thank you.

Sheri Savage -- Chief Financial Officer

Thank you.

Jim Scholhamer -- Chief Executive Officer

Great. Thank you.

Operator

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.

Jim Scholhamer -- Chief Executive Officer

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

Operator

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.

Duration: 26 minutes

Call participants:

Rhonda Bennetto -- Vice President Investor Relations

Jim Scholhamer -- Chief Executive Officer

Sheri Savage -- Chief Financial Officer

Quinn Bolton -- Needham & Company -- Analyst

Karl Ackerman -- Cowen and Company -- Analyst

Christian Schwab -- Craig-Hallum Capital Group -- Analyst

David Dooley -- Steelhead Securities -- Analyst

More UCTT analysis

Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.