Ultra Clean Holdings, Inc.(UCTT)Q1 2025 法說會逐字稿

Good afternoon, ladies and gentlemen. And welcome to the UCT Reports Q1, 2025 Financial Results Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. This call is being recorded on Monday, April 28, 2025. 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 Clarence Granger, Interim CEO; Sheri Savage, Chief Financial Officer; and Cheryl Knepfler, our VP of Marketing. Clarence will begin with some prepared remarks about the business and Sheri will follow that 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 Clarence.

Thank you, Rhonda. And good afternoon, everyone. We appreciate you joining our first quarter 2025 conference call. I'll start with a brief review of our financial and operating results, followed by some commentary on the near and longer term semiconductor market landscape. I'll also highlight some opportunities we are pursuing and then I'll turn the call over to Sheri for a more detailed financial discussion. First of all, due to some push-outs and demand from our customers and some shipment delays due to technical challenges that our customers had with their customers, we missed the midpoint of our revenue guidance range by about $12 million. While we are disappointed by this miss, it was not caused by any performance issues or customer issues on UCT's part. Going forward, as you all know, the global reciprocal tariff war has disrupted nearly every industry and supply chain in every market around the world.

Companies in all industries are having to assess where their existing inventory is, what U.S. bound inventory they may want to ship or hold, and what alternative markets may be available for their products. On the upside, chip makers are likely to continue positioning for future demand by adding critical capacity and completing ongoing node transitions at key paths. This supports our belief that $1 trillion in chip revenue by 2030 remains likely. However, the timing of the broader capital expenditure required to reach that goal is uncertain. Just like our customers and their customers, we are actively monitoring the geopolitical landscape and will make the necessary adjustments to our business to maximize efficiency. We can't predict how long this period of uncertainty will last. What we are presuming is that the already slower semiconductor market recovery that became apparent earlier this year will be extended.

As you saw from our Q2 guidance, we are factoring in a modest decline in demand for the June quarter. And based on what we know today, we anticipate bouncing around these revenue levels for the remainder of this year. With this in mind, we are focusing internally on how we can improve our business performance. Over the last several years, we have made multiple acquisitions that have added to UCT's capabilities. And while these operations have performed well, we have not had the time to fully optimize them. We will now focus on doing that. Also, with our history of growing faster than the semiconductor equipment industry as a whole, we had anticipated being well on our way to a $4 billion run rate by this time. However, given the length of the current industry downturn, we are presently at a $2 billion run rate. We are now going to look at all of our business systems and cost structures and scale them to our current volumes.

This will include facilities, people, equipment, and discretionary expenses. At the same time, we will continue to work closely with our customers' engineering teams to qualify new products and new vertically integrated components. UCT is in a relatively strong position given all the geopolitical uncertainties. To mitigate future supply chain disruptions post-COVID, we initiated a localized supply chain strategy. We reconfigured our procurement and qualification processes to ensure faster market responsiveness and enhanced resilience by securing reliable local supply sources for our global sites. These initiatives included sourcing key components within the Asia Pacific region to continue to support our local Chinese OEM customers. At the same time, we strategically invested in capacity and operational efficiencies at other global sites to maximize profitability as utilization increases with demand.

Despite all the tariff distractions, our teams remain focused on what really matters to us, seamless collaboration with our customers by identifying opportunities and designing solutions for the most challenging technology roadmaps. We continue to advance several opportunities in products and services that will create significant value over the long term. For instance, we have tripled our portfolio in lithography and continue to see incremental share gain at our third largest customer. Another exciting area where we hold a unique competitive advantage over the long term is in the sub-fab space where our engagement with our customers has expanded to include onsite engineering support. One other encouraging development is the accelerated ramp of the Arizona fab owned by the world's largest chip maker that is scaling up twice as fast as originally planned. This benefits our services business.

We expect all these initiatives will gain momentum once economies of scale kick in commensurate with a market recovery, enhancing our leadership position as the manufacturer of choice for our customers. In summary, before I turn the call over to Sheri, we expect greater clarity to emerge in the coming month and we'll closely continue to monitor potential impacts for us and our customers. Meanwhile, we will focus on managing our business in a very disciplined manner. We remain focused on the core strengths of our business, including technology leadership, manufacturing excellence, and customer trust as we work to further reinforce our competitive position. It's important to keep in mind that despite ongoing uncertainty from tariffs and the cyclical nature of the semiconductor industry, the industry has consistently outperformed other markets over the long term. The industry outlook remains highly promising with semiconductors serving as essential enablers of numerous transformative mega trends. We believe that UCT will again outpace the market and drive increased earnings as top line growth recovers. And with that, I'll now turn the call over to Sheri.

Thanks, Clarence. And good afternoon, everyone. Thanks for joining us. In today's discussion, I'll be referring to non-GAAP numbers only. As Clarence just noted, we saw a softening of demand for our product business unit late in the quarter. We are focusing internally on positioning ourselves from a cost perspective for the environment we are in. That means we are reviewing our headcount, our organizational structure, and our footprint, and we are further optimizing our acquisitions that we've made over the last several years. This will allow us to adjust our cost structure accordingly to protect profitability as we move through 2025 and beyond. For the first quarter, total revenue came in at $518.6 million compared to $563.3 million in the prior quarter. Revenue from products was $457 million compared to $503.5 million last quarter due to weakening demand late in the quarter. Our services business had a good quarter with revenues increasing from $59.8 million in Q4 to $61.6 million in Q1, primarily from two of their top customers.

Total gross margin for the first quarter was 16.7% compared to 16.8% last quarter. Products gross margin was 14.9% compared to 15.2% in Q4 and services remain flat at 29.8%. Margins continue to be influenced by fluctuations in volume, mix, and manufacturing regions as well as material and transportation costs. So there will be variances quarter-to-quarter. Given the uncertainties surrounding tariffs, we remain focused on execution and we are ready to react quickly to any new trade regulations. Operating expense for the quarter was $59.4 million compared to $55.3 million in Q4. As a percentage of revenue, operating expenses were 11.5% versus 9.8% in Q4 due to lower volumes and increased expenses. Q1 operating expenses are typically higher due to an increase in year-end activities such as audit-related costs. As I noted earlier in my comments, we have instituted cost-saving measures that we expect will reduce our operating expense run rate as we move through the year.

Total operating margin for the quarter came in at 5.2% compared to 7.7% last quarter. Margin from our products division was 4.6% compared to 6.6% and services margin was 10.2% compared to 9.7% in the prior quarter. The overall margin decrease for products was primarily driven by lower volumes. Our tax rate was 20% for this quarter compared to 14.5% last quarter. Our mix of earnings between higher and lower tax jurisdictions can cause our rate to fluctuate throughout the year. For 2025, we expect our tax rate to be in the low to mid-20s. Based on 45.4 million shares outstanding, earnings per share for the quarter were $0.28 on net income of $12.7 million compared to $0.51 on net income of $22.9 million in the prior quarter, primarily due to lower revenue and higher operating expenses. Turning to the balance sheet, our cash and cash equivalents were $317.6 million compared to $313.9 million at the end of last quarter.

Cash flow from operations was $28.2 million compared to $17.1 million in last quarter, mostly due to working capital efficiency and tight inventory control. Subsequent to quarter end, we repurchased 182,000 shares at a cost of $3.4 million as part of our repurchase program. The tariff situation remains very fluid. We are actively monitoring the geopolitical landscape and will make the necessary adjustments to our business to maximize efficiency and protect profitability. Given the heightened uncertainty within the semiconductor market at this time, we project total revenue for the second quarter of 2025 to be between $475 million and $525 million. We expect EPS in the range of $0.17 to $0.37. And with that, I'd like to turn the call over to the operator for questions.

Your first question comes from Charles Shi of Needham.

I want to start with the first question. I want to learn a little bit more about what exactly happened and what exactly you were seeing when you said softening demand late in the quarter. I want to provide a couple of numbers I saw from the press release or the PowerPoint. It looks to me that the revenue actually coming from your largest customer was flat quarter-on-quarter. And the second largest customer may be down a little bit, but not to the same degree as what we saw on the top side. So I wonder where exactly the weakness that you are seeing? And then maybe, this is maybe related, what's the China revenue number or percentage for the March quarter?

First of all, let me address the softening demand we experienced in Q1. We had already adjusted our guidance based on our expectations for the quarter, some of which was influenced by our Asian customers and a few others. Ultimately, we fell short of the midpoint of our guidance by about $12 million, primarily due to two customers: one from Asia and another from Europe. Both encountered technical issues that prevented us from shipping. This is why we missed our Q1 guidance by approximately $12 million. Regarding China, it's a complex and continuously changing situation. However, we are forecasting a slight revenue increase in Q2 and even more growth in the second half of the year. We're starting to feel more confident about our China situation. Our strategy for the Chinese market is proving to be effective, which we are pleased about. Now, could you remind me of your other question, Charles?

Clarence, I think the way you answered the question, you actually covered most of the part of my question. So maybe a quick follow up. In March quarter, what's the China revenue percentage or China revenue on a dollar basis, is that something you can provide on this call?

My CFO is waving at me furiously that I'm not supposed to say a number.

We'll wait for that…

We don't have a specific percentage for you, Charles. It is increasing slightly quarter-over-quarter, and we anticipate it will continue to grow in the second half. We will provide additional guidance when we have it.

We certainly don't provide guidance out any further than one quarter.

I would like to ask a follow-up question. You mentioned a decline in customer demand towards the end of the quarter and that you have lowered your guidance for June and beyond. It seems like you anticipate staying around the June quarter levels. However, some of the weaknesses you're observing appear to be indicative of a longer-term impact rather than just a temporary issue for a single quarter. Are there any changes in customer behavior that suggest this will affect multiple quarters? Or is there another reason that leads you to believe we shouldn't expect a stronger second half for your business or any recovery soon? I hope that question makes sense.

Yes, I think it's fairly clear, Charles. So from my perspective, obviously, there's a lot of uncertainty going on in the market right now. So we're pretty comfortable that there isn't going to be any dramatic downturn from this point, but there might be a minor downturn is at least what we're seeing right now. And that's kind of why we've said it's going to be bouncing around the $500 million per quarter range. But there's clearly a lot of uncertainty in the market right now. And I'm going to let Cheryl address that. So Cheryl, if you want to talk about that a little bit, I'd appreciate it.

I mean a number of the customers and other folks have already talked about the fact that they are seeing a little bit of softness in the second half prior to anything related to tariffs or anything else. So what we're seeing and saying is a reflection of that. So obviously, the level to which and things that we're forecasting, we just don't have the visibility beyond what is being said and what's being communicated to us to do that. So we had indicated that we expected some level of decline for a period and it's just looking to extend a bit.

Maybe a last question from me. There is this 90-day pause for tariffs but we're basically looking at maybe by early July, some of the tariffs are going to go up. And have you guys done any scenario analysis to see how that's going to impact the business one way or the other, and if there's any conclusions or any view on that can you share with us? And so we do want to know what kind of impact there can be from the tariffs at least from a profitability standpoint?

That's a very good question. We've been focused on this heavily in the last few months with a dedicated team assessing the potential impact and how it will affect us and our customers. We're working closely with our customers to understand the implications. The variability from day to day makes it a bit challenging, but I can share some insights. We have been discussing our China strategy for over a year, and by the middle to the end of the third quarter, all products we manufacture in China will be for the Chinese market. Consequently, we won't be manufacturing products in China for the United States or vice versa, so we expect minimal impact from the China counter-tariff situation. Regarding other products, we have a good understanding of the potential effects, although we're not comfortable sharing a specific dollar amount. It's important to note that many components used in the U.S. come from outside the country, and these will incur tariffs affecting our customers and products exported from the U.S. We've identified that more than half of the tariffs potentially impacting us are related to components specified by our customers.

If they choose not to change those components, we will pass those costs on to them, and they're aware of this. Additionally, there are opportunities to utilize alternative suppliers. We're confident and collaborating with customers on strategies like free trade zones to help mitigate tariffs. Overall, we believe any tariffs we face in the long term will have a minimal and non-material impact on our business. Our biggest challenge will be data collection, controls, and record-keeping to manage these tariffs and related costs. Despite the complexities, we do not foresee a significant adverse effect on our financial results.

Your next question comes from Krish Sankar of TD Cowen.

This is Robert Mertens for Krish Sankar. You previously mentioned some challenges in your domestic China semiconductor capital business that emerged in the December quarter last year, and you initially expected a decline this quarter, with possibly softer results in Q2. Can you provide more insight into the outlook for the year? I know the biggest impact was customer-specific; is that still true, or can you quantify your expectations for overall demand in the region? Also, how might any potential inventory surplus there affect the second half of this year? I have one more follow-up question.

So let me try and do my best I can on the China. So first of all, we said that the situation was slowing down in China in Q1. And so we already anticipated that and shared that with you. In addition to that, I said that of the $12 million shortfall, roughly half of that was associated with another customer in China who was unable to ship because of technical issues that they had with one of their customers. And then in addition to that, what we're trying to say is that our Q2 numbers, without giving a specific number, are going to be up a little bit from our Q1 numbers, and we're feeling pretty confident now that Q3 and Q4 should be some slight recovery in China from going forward.

And just in terms of the China for China business, could you provide any color in terms of maybe what their customers' technical delays may have been related to or if you have any idea, memory or foundry or anything like that would be helpful?

We really don't want to talk about technical issues that our customers had. So in terms of what products that we serve in Asia, can you answer anything there?

So when we look at the overall, obviously, there are a number of both NAND, DRAM, and foundry all of which are looking at replacements of other technologies because of limitations. So we expect it to be distributed across that as they go forward. So exactly which would be there as the current challenge, we are not certain, but we do expect it to be at their largest opportunities are going to be at the three largest vendors in China. And so we expect when things are cleared up and going forward that the level of demand should be substantial and would look at addressing the inventory that was built because that would be why they built that level of inventory to meet expected large demand.

We want to be cautious about overstating our situation. Everyone is understandably concerned about China and its implications, but China represents less than 10% of our overall customer base. Therefore, it's important to keep things in perspective. That said, we're comfortable with our position in China.

And then just one last one, if I can squeeze in, for that business and you're expecting it to improve a little bit this next quarter and hopefully, you've incrementally improved through the second half of this year. Do you have any sense of what impact potential export controls could have on that business? I know it's locally sourced. But if you have any way to view what may happen if exports controls tightened even company specific for those domestic suppliers.

That's hard to predict. But from our perspective, it's likely to have no impact because our Chinese customers that we're shipping to in China is 100% for China. Obviously, there are some U.S. customers that may be impacted by restrictions on what they can and can't ship into China, but that isn't what we're talking about here. What we're talking about is our China customers in China and making those products in China for them.

Your next question comes from Christian Schwab of Craig Hallum.

Sheri, could you provide more details on the cost reduction plans and headcount mentioned earlier regarding aligning the company size with a $2 billion run rate? Should we expect operating expenses in the second half of the year to reach an annualized figure of approximately $190 million to $200 million? Is that the correct way to think about it?

We are examining all aspects of our operations, particularly our headcount and overall footprint, which are among our largest expenses. We're focusing on these areas as well as our organizational structure. While we're analyzing both Cost of Goods Sold and Operating Expenses, our main emphasis is on the OpEx side. At this moment, I can't provide a specific number because our analysis is ongoing. However, we have already begun reducing headcount and will continue to evaluate that as the year progresses. We previously had a footprint that supported a potential $4 billion run rate, and we're looking to optimize it to achieve maximum efficiency. Although we anticipate growth in the future, it may take longer than we initially thought, so we're also assessing discretionary spending. We're exploring various options, and you'll see our plans materialize in the next quarter or two. The process has already started, and we expect to see benefits soon. Our guidance reflects a decline in revenue, but the EPS is only slightly down because we have initiated some cost-saving measures.

And regarding the operational expenses, will you reach a certain level that can be publicly announced, such as a specific percentage of workforce reduction, or will this process unfold gradually over several quarters?

We are not ready to make an announcement at this time, but we will keep evaluating the situation and determine if an announcement becomes necessary. Currently, we are not at that stage.

And I think I've wrote it down, but any tariff costs your customers are already prepared that you'll pass that on to them? Did I hear that correctly?

Nobody wants to take on additional costs. We are all looking for solutions. From our viewpoint, while not all costs are affected, a significant portion related to tariffs are components specified by our customers. They recognize they are responsible for these costs, and we will promptly transfer those expenses as they arise. There are also areas where we might have some influence, and we are already collaborating closely with our customers to explore changing supply sources or to see how we can assist them. One of our larger customers is considering utilizing some free trade zones, and there are many discussions ongoing about the long-term implications. However, we anticipate that any costs incurred will be relatively minor and manageable for us. Therefore, we feel quite confident about the situation.

And then my last question. In the prepared comments, we talked about push-outs and technology challenges, but it seems that in answering the questions that it was really technology challenges by two customers and customers that caused the delay in fulfilling orders or pushing them out. You didn't see push-outs above and beyond the technology challenges of the two customers or did you?

No, you are correct. We really didn't see any significant delays at the end of the quarter for the customer. We are cautious and have slightly lowered our guidance this quarter due to the uncertainty. The tariffs only started at the beginning of this quarter, and there's a lot of general confusion in the marketplace. We anticipate some slowdown because of the nervousness. Cheryl, would you like to add to that?

Clearly, all of our customers are preparing for long-term demand as they anticipate the needs to support $1 trillion by 2030. We believe this is a significant driver for the industry. However, we intend to approach this with caution, recognizing that everyone's comments are based on current knowledge. Given our position in the supply chain and the possibility that our customers may have excess inventory, there are many factors outside of our control that limit our visibility. Therefore, we are adopting a more cautious outlook as we move forward.

Your last question comes from Edward Yang of Oppenheimer.

Clarence, I mean, just a lot of puts and takes going on. Would you be able to just give us an updated view on WFE growth for 2025?

I'm not going to touch that. I'll let Cheryl deal with that.

So as we look at 2025, as a starting point, I think 2024 came in a little bit higher than what had been forecasted before the third party has made their announcements around that. So at this point, I don't think anyone is in a position they're going to increase the forecast for 2025. So even with that, we were looking at about a 2% to 3% year-over-year increase. I think with the uncertainty in the market, it is unlikely that that is going to grow. In fact, Intel announced that they were looking at about a $2 billion reduction in their CapEx. Obviously, part of that was going into buildings but not necessarily equipment. But I do think that everyone is going to be looking at that. And there is more downside risk than upside opportunity, and that's what we're looking at sizing for. So I think everyone would be relatively thrilled if it ends up at the $100 billion that Lam indicated. And so that we certainly see that as an opportunity, but we do not know if that is where things will end up.

In your business, have you seen any pull-ins or front loading of demand related to tariffs? And I only bring this up because you hear about retailers that stocked up on inventory, consumers panic buying iPhones ahead of tariffs. Have you seen any direct front loading on your end or do you think there have been some secondary impacts from that, that could potentially affect future push-outs or shipment delays outside of the technical qualification issues that you mentioned earlier?

I don't really think so. If there are any pull-ins or issues related to timing and tariffs, they seem quite minor to us at this moment. So I don't believe that's a concern for us. Obviously, if you were purchasing clothing from Asia, you might be very worried about that. But we are not in that kind of situation, and I don't see anything comparable to that.

And then just finally, just an update on the CEO search?

So I was wondering if anybody was going to ask that. So I'm sneaking up on two months now. What we said is it should take about six months. We have hired a search firm, and they told us it's likely to be three or four more months in the process. So I think my original six-month timing sounds pretty good. So I'm going to stick with that.

There are no further questions at this time. That concludes our question-and-answer session. I'd like to turn the conference back to Mr. Granger for closing remarks.

Well, thank you, operator. And thanks, everybody, for joining us on this call. We look forward to speaking to you again in our next quarterly call. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.