Extremely Clear Holdings Inc (NASDAQ:UCTT) This autumn 2022 Outcomes Convention Name February 22, 2023 4:45 PM ET
Firm Contributors
Rhonda Bennetto – SVP Investor Relations
Jim Scholhamer – CEO
Sheri Savage – CFO
Convention Name Contributors
Quinn Bolton – Needham & Firm
Krish Sankar – Cowen
Christian Schwab – Craig-Hallum Capital Group
Operator
Good day, and welcome to the Extremely Clear Fourth Quarter and Full Yr 2022 Convention Name. [Operator Instructions] This occasion is being recorded.
I’d now like to show the convention over to Ronda Bennetto, Investor Relations. Please go forward.
Rhonda Bennetto
Thanks, operator. Good afternoon, everybody, and thanks for becoming a member of us. With me at the moment are Jim Scholhamer, Chief Government Officer; and Sheri Savage, Chief Monetary Officer. Jim will start with some ready remarks in regards to the enterprise, and Sheri will observe with the monetary evaluation, after which we’ll open up the decision for questions.
In the present day’s name accommodates forward-looking statements which might be topic to dangers and uncertainties. For extra info, please seek advice from the Threat Elements part in our SEC filings. All forward-looking statements are primarily based on estimates, projections and assumptions as of at the moment, and we assume no obligation to replace them after this name. Dialogue of our monetary outcomes shall be introduced on a non-GAAP foundation. A reconciliation of GAAP to non-GAAP may be present in at the moment’s press launch posted on our web site.
And with that, I might like to show the decision over to Jim. Jim?
Jim Scholhamer
Thanks, Rhonda, and good afternoon, everybody. Thanks for becoming a member of us for our fourth quarter and full 12 months 2022 convention name and webcast. First, I will spotlight just a few monetary outcomes that Sheri will broaden on in her commentary. I will observe this with an outline of what we’re seeing within the semiconductor market within the close to time period and summarize our plans as we play a extra important, significant position within the worth chain.
Strong execution from our international groups in 2022 resulted in a document 12 months for UCT with income rising 13% year-over-year and working revenue reaching a brand new excessive of $260 million. Wanting again on this extraordinary three-year business ramp, UCT’s annual income grew virtually 123% and earnings per share surged 243%. That is a compound annual development fee of 31% for income and 51% for earnings per share in comparison with the business CAGR of twenty-two% in the identical interval.
Late within the fourth quarter, it grew to become obvious that the business was headed right into a downturn as our clients shortly pushed out and canceled orders in speedy response to their clients doing the identical.
Reductions in finish market demand have been felt all through the worth chain and has prompted suppliers and repair suppliers like UCT to make speedy changes to near-term manufacturing, operations and monetary forecasts.
As a result of our clients and their clients are taking actions to deliver surplus stock into steadiness as shortly as attainable, we consider the key step down of orders are mirrored in our This autumn outcomes and Q1 forecast. We count on the order stream to stabilize round these new ranges. We now have not modified our optimistic view that the basic drivers of our business will propel important development over the long run.
Not surprisingly, after three consecutive years of document WFE development accelerated by pandemic-related demand for know-how, we’ve got entered a correction interval.
Each semiconductor cycle has its personal distinctive traits, on this one, along with provide, demand and stock imbalances, at the moment, the business can be grappling with lingering results from the pandemic, inflationary pressures, unsettling geopolitical occasions and notable macroeconomic influences equivalent to commerce wars and export restrictions.
All of those elements mixed, supported by what we have not too long ago heard from IDMs and OEMs and our inside advertising and marketing intelligence, we consider weak point could proceed by means of 2023.
Whereas the decrease tools funding will primarily affect our merchandise enterprise, there are pockets of alternatives we shall be capitalizing on. We shall be ramping merchandise in markets like lithography, that are anticipated to develop in 2023. And whereas not but on the stage to offset declines in different segments of WFE in 2023, over time, our place on this house will proceed to broaden as a share of our income.
In our Providers Group, the place income is extra intently tied to wafer begins, we see a decline in enterprise, however at this level, it’s lower than what we count on for WFE.
Whereas we hope {that a} restoration begins to materialize sooner, we’re restructuring our enterprise to keep up flexibility and optimize profitability, identical to we did through the 2018-2019 downturn that lasted 5 quarters. We’re taking speedy motion inside our variable value mannequin, together with sharp reductions in time beyond regulation, a major lower of non permanent staff and utilization of regular attrition.
To organize for the subsequent ramp and help our development technique, we’re consolidating our footprint and making enhancements inside our provide chain to reinforce value and supply efficiency, amongst many different actions. We’re balancing our value discount actions with key strategic funding applications, equivalent to proliferating our single ERP resolution, ramping Malaysia, including fluid options machining capabilities and increasing capability at a few of our service websites to help new chip fabs within the U.S. in 2024 and past.
UCT has a confirmed playbook to efficiently handle by means of business cycles and emerge a a lot stronger, extra worthwhile firm every time. Whereas our focus over the previous few years was totally on assembly demand, at the moment, we’re taking the chance to remodel our enterprise processes and international operational footprint, so we’ve got the providers, merchandise and capability to scale shortly and effectively to fulfill buyer demand when the business rebounds as a result of the business at all times rebounds.
In abstract, whereas the chip business is notoriously cyclical and experiences fluctuations, we view present enterprise situations as a possibility to enhance our backside line within the subsequent up cycle, whereas making certain that we defend our revenues and optimize our capabilities to safe long-term development.
By working intently with our clients at the moment, we’re rising our strategic relevance inside this worth chain and count on to proceed to outperform the market on a median over the long run.
I wish to thank our staff and our shareholders for his or her continued help, and I stay up for updating you on our subsequent name. With that, I will flip the decision over to Sheri.
Sheri Savage
Thanks, Jim, and good afternoon, everybody. Thanks for becoming a member of us. In at the moment’s dialogue, I shall be referring to non-GAAP numbers solely. As Jim famous, 2022 was a document 12 months of UCT for income and working revenue. Through the 12 months, we paid down our debt by $40 million and spent $12.1 million repurchasing shares and prudently invested in tasks to help our long-term development technique.
Whole income for the fourth quarter got here in at $566.4 million in comparison with $635 million within the prior quarter. Merchandise division income was $499.5 million in comparison with $556.3 million final quarter. And income from our Providers division was $66.9 million in comparison with $78.7 million in Q3.
The robust demand we noticed within the first three quarters of 2022 led to a document income of $2.4 billion for the 12 months, up 13% from the prior 12 months. Merchandise generated income of $2.1 billion, up 15% year-over-year, and Providers contributed $299.6 million, flat with the earlier 12 months.
Whole gross margin for the fourth quarter was 19.5% in comparison with 20.6% final quarter. Product gross margin was 17.7% in comparison with 18.3% within the prior quarter, and providers was 33.5% in comparison with 36.9% in Q3. Margins may be influenced by fluctuations in quantity, combine in manufacturing area in addition to materials and transportation prices. So, there shall be variances quarter to quarter. Whole gross margin for the 12 months was 20.2% in comparison with 21.4% final 12 months.
Working expense for the quarter was $53.8 million in contrast with $56.5 million in Q3. As a share of income, working expense was 9.5% in comparison with 8.9% within the prior quarter. For the 12 months, working expense as a share of income was 9.3% in comparison with 9.2% within the prior 12 months. Whole working margin for the quarter was 10% in comparison with 11.7% within the third quarter.
Margin from our Product division was 9.9% in comparison with 10.8% within the prior quarter. And Providers margin was 11.3% in comparison with 18.2% within the prior quarter. The discount in margins was primarily as a consequence of decreased efficiencies for each divisions on decrease quantity. For the complete 12 months, working margin got here in at 11% in comparison with 12.2% within the prior 12 months. Primarily based on 45.7 million shares excellent, earnings per share for the quarter was $0.93 on internet revenue of $42.6 million in comparison with $1.06 on internet revenue of $48.6 million within the prior quarter.
For the complete 12 months, earnings per share had been $3.98 on internet revenue of $181.9 million in comparison with $4.20 on internet revenue of $186.1 million in 2021. Our tax fee for the quarter was 13.7% in comparison with 17.9% final quarter. For the complete 12 months, our tax fee was 15.9%. We count on our tax fee for 2023 to remain within the mid-to excessive teenagers.
Turning to the steadiness sheet. Our money and money equivalents had been $358.8 million on the finish of the fourth quarter in contrast with $453.5 million final quarter. Money from operations was an outflow of $38.8 million in contrast with an influx of $71.7 million within the prior quarter as a consequence of decrease cargo quantity and timing of money collections and funds. For the complete 12 months, money move from operations was $47.2 million in comparison with $211.6 million within the prior 12 months.
Within the fourth quarter, we made an extra debt fee of $13.4 million, bringing our complete debt funds for the 12 months to $40 million. Within the third quarter, the Board initiated a three-year $150 million share repurchase program. Within the fourth quarter, we repurchased 343,000 shares at a complete value of $12.1 million. Subsequent to year-end, we repurchased an extra 389,000 shares at an combination value of $12.9 million, leaving $125 million remaining on our three-year buy program.
Given the present international macroeconomic and geopolitical uncertainty, we’re conserving our steering vary huge and together with a adverse adjustment of $30 million associated to a cybersecurity occasion not too long ago introduced by one among our suppliers. We count on this income to move into the second quarter. We undertaking complete income for the primary quarter of 2023 between $395 million and $445 million. We count on EPS within the vary of $0.12 to $0.32.
And with that, I might like to show the decision over to the operator for questions.
Query-and-Reply Session
Operator
[Operator Instructions]. And the primary query shall be from Quinn Bolton from Needham & Firm. Please go forward.
Quinn Bolton
Congratulations on a document 2022. I do know the atmosphere has modified, however nice to see these outcomes. I assume, Jim, I wished to ask your ideas. In your script, you talked in regards to the majority of the step-down in orders you suppose has taken place in This autumn of ’22 and this quarter right here in ’23. And also you talked about seeing or anticipating orders to kind of stabilize.
And so, as you look out to 2023, how do you see the income profile for the 12 months? I do know you have bought that $30 million that comes out of Q1 and certain will get captured in Q2. However ought to we be enthusiastic about — it appears like the primary quarter stage with out that $30 million affect can be near $450 million on the midpoint. Is that sort of the income stage you see the place issues are stabilizing? Or do you see a distinct stage?
Jim Scholhamer
Hello. Quinn, no, I believe you’ve it precisely proper. Sure, that is true. It might have been round $450 million would have been what we’d have been projecting. And sure, I believe we see it stabilizing at that stage or perhaps barely larger and being — bouncing round roughly these numbers all year long.
We’re clearly hopeful that the second half could possibly be extra constructive as a few of our clients and friends have commented that they are seeking to see if there’s one thing improves within the second half, however our assumption at the moment is bouncing across the quantity that you simply put on the market and a few restoration within the second quarter, assuming that the provider that is impacting us and many individuals proper now is ready to recuperate as properly. So sure, that is precisely the suitable manner to consider it.
Quinn Bolton
Good. You talked about, Jim, the variety of actions you take to streamline operations now together with kind of diminished time beyond regulation, eliminating a few of the variable worker prices. However the place do you see OpEx kind of shaking out within the close to time period as you are taking these actions? And you then additionally talked about facility consolidation. Is that this downturn providing you with the chance to deliver extra enterprise into Malaysia from a few of the different websites all over the world?
Jim Scholhamer
Sure, I believe there are a number of elements to that, Quinn. Sure, we have been by means of a number of of those cycles. And so, taking down the variable value, particularly within the COGS space, we’re fairly skilled at that. And I believe you may see us maintain larger gross margins by means of this cycle than we’ve got previously additionally with our broader firm portfolio that we have assembled because the final downturn.
So, on the OpEx facet, there are just a few headwinds. I will let Sheri speak about that in a second. These take some time to essentially transfer down. And a few of the consolidation actions, after all, these are consolidating the place you’ve two websites comparatively to shut proximity or enterprise has moved from one area to a different and a website is sort of unbalanced because of the final surge of the business the place we rebalance that and consolidate these websites.
These actions take roughly a 12 months to place in place earlier than you begin seeing the advantage of these. We can’t see quite a lot of that affect of these longer-term value reductions till subsequent 12 months. However these will clearly assist us turn into leaner and hit higher numbers within the subsequent upturn, identical to we did within the final one. However Sheri, perhaps you may speak about a few of the different specifics?
Sheri Savage
Sure. So, we got here in at 9.5% for This autumn. We’ll see that go up in Q1 and partially in subsequent 12 months as we transfer by means of it. However we do have fairly just a few discount initiatives in place, particularly surrounding controllable spending inside OpEx, whether or not that be journey or different discretionary spending in addition to taking a look at our headcount and clearly, taking a look at footprint that does play into that as properly.
So, we’re persevering with to take a look at that fairly closely and see that value hopefully come down as we transfer by means of the 12 months as properly.
Quinn Bolton
Positive. Ought to we be pondering perhaps OpEx someplace between, say, 10% and 11% of gross sales? Or do you suppose it might go even larger simply given the magnitude of the quarterly change in income in March?
Sheri Savage
Sure. We have seen it, I believe previously, after we’ve gone by means of downturns anyplace between 10% and 12%. So, I’d assume that it will be round that — inside that vary relying upon the income stage. So clearly, Q1 has come down. Some because of this cyber-attack together with simply the business coming down. So, I anticipate that it will be in all probability somewhat larger as a share of income for Q1. However as we transfer by means of the 12 months, I believe it is going to come as much as a extra normalized vary.
Quinn Bolton
Thanks.
Operator
The following query is from Krish Sankar from Cowen. Please go forward.
Krish Sankar
Hello, thanks for taking my query. That is Stephen calling on behalf of Krish. I assume, Jim or Sheri, only a fast query first on This autumn and a few of the affect from, I assume, manufacturing limitations in China that you simply guys beforehand highlighted. I assume relative to that $60 million delta between what you reported for This autumn and your authentic steering midpoint, how a lot of an impacted manufacturing restriction have? And the way is that state of affairs right here in Q1 to this point?
Jim Scholhamer
Sure. In This autumn, the key affect was really the business downturn and quite a lot of canceled and delayed orders. The COVID affect turned out to be a lot smaller than we first feared. I believe it was roughly $8 million or $5 million. And that manufacturing facility is up and working usually proper now. What was the second a part of your query on that?
Krish Sankar
Sure. Is there any — I assume you [indiscernible] the reply, I assume there is not any follow-on affect right here in Q1. Is that appropriate?
Jim Scholhamer
No. The one sudden affect in Q1 was one of many key suppliers for the business. and the problem that they are having with the cyber-attack. These elements are utilized in a number of areas of the instruments by many people.
Krish Sankar
All proper. Acquired it. My follow-up query is concerning kind of your, I assume, your reminiscence publicity. I believe in your slide deck, you present your publicity on a income foundation out of your largest buyer is holding regular round 40% in This autumn relative to Q3.
Simply sort of questioning, simply given a few of the discuss within the business over the previous couple of weeks about reminiscence makers or suppliers probably not slicing CapEx considerably this 12 months as initially anticipated, I assume, how do you see that, if any, at the moment flowing by means of to your outlook for the second half of the 12 months?
Jim Scholhamer
Sure. It is arduous to foretell what impacts. I believe clearly, we’re seeing Samsung seeking to spend somewhat bit by means of the cycle greater than a few of the different reminiscence or foundry makers as properly. So, it is actually arduous to say if that is going to — what that is going to seem like or if there are any additional cuts from the reminiscence makers. So, I believe that is why we’re taking the view of not anticipating a restoration within the second half of the 12 months, however clearly, a pleasing — constructive shock is feasible.
Krish Sankar
Thanks.
Operator
And the subsequent query is from Christian Schwab from Craig-Hallum Capital Group. Please go forward.
Christian Schwab
Nice. Jim, after you are taking the variable value of COGS out, I am simply questioning, will we — what your utilization fee of labor is? After which — extra importantly, as we glance to the eventual restoration at a $450 million run fee enterprise quarterly, plus or minus. What’s your utilization fee then on instruments and amenities?
Jim Scholhamer
Sure. The utilization on labor with a while lag, we are inclined to sustain not at 100%, however fairly near even by means of the down cycles after we’re not in a position to obtain it by means of regular technique of time beyond regulation, and we feature a big non permanent workforce typically as much as 35%, 40% through the upturn.
So, after we’re not in a position to meet these utilizations and we make the most of different issues like shutdowns, which we’re doing on this quarter and different strategies as properly. So, we hold the labor utilization very excessive. So, we count on to have the ability to hold the gross margins up.
Clearly, the footprint and the instruments and the prices and COGS is tougher to cowl. I could not offer you a precise quantity on the utilization, however I believe for those who assume we had been 100% utilized on the 630 million, do the mathematics on the quantity, which is 65% of that, I believe you would be someplace roughly round there. We weren’t 100% utilized within the Malaysian footprint, however we had been 100% utilized within the workforce there. So, we perhaps put it at round 60% or so.
Christian Schwab
Okay. No, that is nice. After which are you able to simply remind us on the product combine, the tip markets that you simply serve. Are you able to — between reminiscence, mature, superior logic, the place the overwhelming majority of your shipments to your two main clients find yourself being utilized by finish clients’ fabs. Does that make sense?
Jim Scholhamer
Sure. It is really arduous for us to trace on a working foundation is after we ship a device to our clients, once more, that very same device can go or the identical module can go to any utility. So, it is not one thing I can actually forecast. However I believe you’d count on it to observe precisely the place the capital is being spent proper now.
So, reminiscence is clearly going to be down as extra of the instruments are going to foundry and Samsung as properly. So, I believe you may see a shift that manner. However I could not offer you a brand new pie chart on reminiscence versus logic foundry at this level. However undoubtedly, it will be transferring in direction of much less reminiscence, as you’ll count on.
Christian Schwab
Nice. After which ought to we assume that gross margins enhance sequentially in Q2 after which the sort of flat line at these kind of ranges given labor shall be fastened shortly. After which is that the way in which we needs to be enthusiastic about that?
Sheri Savage
Sure. I’d assume that it will be capable to stage out on the Q2 stage. After which hopefully, relying upon what occurs within the second half, we’d see it keep round that vary as we transfer by means of the remainder of the 12 months.
Christian Schwab
Nice. After which my final query is remind us, for those who might, what lead occasions had been pre-pandemic or fairly robust three years nevertheless you need to do it. What they had been through the robust three years and what you count on them to be on the bottom of this?
Jim Scholhamer
Are you speaking about device lead occasions from our clients to theirs?
Christian Schwab
Sure, lead occasions to clients.
Jim Scholhamer
From us to our clients?
Christian Schwab
Sure.
Jim Scholhamer
Okay. Sure. relying on what a part of our portfolio you are taking a look at, the fluid options, the previous Ham-Let, these lead occasions are comparatively — have been comparatively brief, and quite a lot of that’s vendor managed stock. Should you’re speaking about a few of the different, like, let’s name it, built-in module piece of our enterprise that was stretching out to 2 to a few months in lots of instances.
and typically even longer through the upturn. And clearly, they’re rather a lot sooner now or, in some instances, instantly prepared for cargo ought to the purchasers require them.
Christian Schwab
Honest. Okay. So so far as because the lead occasions are comparatively brief, sort of what you implied your visibility of two and — what number of different quarters of digestion at these kind of ranges, final cycle, I believe you urged it was 5 quarters actually, it is going to be decided by the dialogue and the course that we hear from AMAT and lab. Is that honest?
Jim Scholhamer
sure. For years main as much as this final up cycle, the place the demand with out stripping the provision for everybody within the business, we had been — that is after we had been seeing a really uncommon fourth quarter bookings that was fairly simple to forecast. We’re extra again within the regular state the place we will see one quarter out comparatively clearly aside from sure pressure majeure occasions like we have been experiencing like COVID and cyber.
So, I believe we’re again to sort of seeing one quarter out and with somewhat bit much more blurriness as a result of frankly we’ve got to maintain monitor of sometimes, there’s not a lot stock between us and our clients.
However because the orders fall off fairly sharply on the finish of 2022 and additional within the first quarter, some stock constructed up between us and our clients, which isn’t a typical state. So, we additionally need to strive to determine what — even after we take a look at finish demand and what is going on on there, we’ve got to additionally attempt to piece collectively what’s going to really [indiscernible] an order e-book for us.
Christian Schwab
Sure. After which only a follow-up on that. It will likely be my final query. Do you’ve an concept of how a lot combination greenback quantity of stock is sitting between you and the shopper that traditionally is just not there?
Jim Scholhamer
No. We do not — once more, lots of the issues that we make we do not personal 100% share of that modules. Typically we’re 50% or 60% or 70% share. So, we do not know what they’re holding of the identical kind of factor that we make that could be a competitor made as properly. So, all we all know is that the warehouses of a lot of our clients are very full to the purpose the place we even — within the case right here or there, we could need to even maintain on to one thing for them.
So, it is fairly huge proper now, and that is why you would possibly see once they report much less dramatic drops in income. There’s a few elements there. One is that they’re working by means of their deferred income for issues that they’ve already shipped. And two is as a result of they do have rather a lot of their stock proper now.
However I believe that can burn off sooner or later. However I believe we’re fairly assured. Once we put all these completely different items collectively, the headwinds and the tailwinds, the quantity that I believe Quinn was speaking about make quite a lot of sense.
Operator
and the subsequent query is a follow-up query from Quinn Bolton from Needham & Firm. Please go forward.
Quinn Bolton
Sheri, only a fast follow-up for you. If we’re enthusiastic about income down roughly 25% or about $600 million year-on-year, and I am attending to that $1.8 billion simply by annualized — or sure, annualizing the $450 million quarterly run fee we have been kind of talking about.
Are you able to give us some sense, what do you see the incremental margin fall by means of on that decrease income is? I imply, ought to we be modeling like a 25% incremental margin? Or is there a greater determine to be enthusiastic about simply as we expect by means of the gross margin development for the 12 months?
Sheri Savage
Sure. I believe — I imply, the gross margin I do not see main decline in gross margin. I imply there’s going to be some extent or two, however it’s not as a lot as what we have seen in earlier downturns. However I believe First off, I believe the combination is perhaps somewhat bit completely different, but in addition, we have completed an excellent job of constructing positive that we will shift sure assemblies to lower-cost areas in addition to bringing our direct labor down in a short time.
In order that one is just not as a lot of an affect. I believe clearly making changes to OpEx is tougher as a result of there’s extra fastened value there, however we see that as, like I discussed earlier than, leveling out to some extent. And clearly, we need to ensure that we’re prepared for the subsequent upturn is the important thing factor for all these classes.
Quinn Bolton
Acquired it. So, a trough gross margin within the 7.5% vary appears like a good place to be.
Sheri Savage
Sure, I believe that is in all probability a low level in all probability.
Quinn Bolton
Okay. Acquired it. Thanks.
Operator
Women and gents, this concludes our question-and-answer session. I wish to flip the convention again over to Mr. Scholhamer for any closing remarks.
Jim Scholhamer
Thanks, everybody, for becoming a member of us at the moment, and we stay up for talking with you at our subsequent earnings convention subsequent quarter.
Thanks.
Operator
And thanks. The convention has now concluded. Thanks for attending at the moment’s presentation. You could now disconnect.
