Participants

Rhonda Bennetto; Investor Relations; Ultra Clean Holdings Inc

Sheri Savage; Chief Financial Officer; Ultra Clean Holdings Inc

Chris Cook; President, Products Division; Ultra Clean Holdings Inc

Cheryl Knepfler; Vice President, Marketing; Ultra Clean Holdings Inc

Krish Sankar; Analyst; TD Cowen

Charles Shi; Analyst; Needham & Co. LLC

Christian Schwab; Analyst; Craig-Hallum Capital Group LLC

Edward Yang; Analyst; Oppenheimer & Co., Inc.

Presentation

Operator

Good afternoon, ladies and gentlemen. Welcome to the Ultra Clean Technologies' fourth-quarter and full-year 2024 earnings call and webcast.
(Operator Instructions)This call is being recorded on Monday, February 24, 2025.
I would now like to turn the conference over to Rhonda Bennetto, Investor Relations. Please go ahead.

Rhonda Bennetto

Thank you, operator. Good afternoon, everyone. And thank you for joining us this afternoon.
With me, today, are Sheri Savage, Chief Financial Officer; and Chris Cook, President of our Products Division, and Cheryl Knepfler, our VP of Marketing. Our CEO, Jim Scholhamer, is unable to join our call today, as he's suffering from a temporary flare-up in his back and sends his sincere regrets.
Sheri will begin with some prepared remarks about the business and 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 Sheri. Sheri?

Sheri Savage

Good afternoon everyone. And thank you for joining our call today.
I will begin with a brief summary of our 2024 financial and operations highlights. And, then, outline our thoughts on the short- and long-term state of the industry landscape. After that, I'll provide more detailed financial review. And, then, we will open the call up for questions.
UCT executed at every level in 2024, growing 21% over the prior year and significantly outperforming our customers, our closest competitors, and the overall WFE market. Our unique and extensive suite of vertically integrated offerings, global manufacturing footprints, and ability to quickly flex to meet customer demands enabled us to capitalize on several windows of opportunity throughout the year.
Areas where we played an instrumental role included growth at the leading edge, driven by investments our customers made and continue to make within the artificial intelligence space, through our Czech Republic site and our long-established In China For China manufacturing business, supplying domestic Chinese OEMs, in country.
Overall, UCT was specifically positioned with our largest customers to quickly align and support their technological roadmap, at every turn throughout the year.
As the world demands higher quantities of chips, chip manufacturers demand more and higher quality manufacturing equipment and processes. As technology evolves, UCT is evolving with it.
The drivers of our industry, currently led by artificial intelligence, will play a profound role in transforming economies, businesses, and societies, over time. We are in the dugout and the first inning of this new world, in overall spend.
To see mass adoption of radical new technologies, we need to see large enterprise use cases and integration at scale. AI will not affect the entire value chain, equally, or at the same time.
UCT is in this for the long haul and will benefit through the various growth stages. Albeit in waves and to varying degrees, at first. To measure success one quarter at a time would not truly reflect the overall value of the contribution we will make, over the long term.
We know that initial proliferation of AI use cases will require more chips in smartphones and personal computers to run the applications. UCT's unique portfolio of vertically-integrated product and service solutions are critical catalysts in helping our customers manage the expanding complexity and growing demand for all manner of devices and applications.
Turning to the semiconductor industry, as a whole, advancements are progressively enabling innovations in materials, science, and engineering, where our customers have clear leadership. Additionally, our customers are seeing opportunities in advanced depth and edge applications that are set to encompass the growing share of WFE.
And as leading-edge logic transitions the gate all around nodes, the total available market expands, dramatically, for our customers and for UCT. Our innovative technology has expanded our engagement beyond hardware into supporting our customers' recipe development and optimization.
In the shorter term, as reflected in our guidance, we are experiencing some air pockets, after an extraordinary growth year. AI represents incredible opportunities, but, as noted, until such use cases reach enterprise scale, there will be ups and downs.
We are experiencing some unexpected demand softness from our In China For China business, relating to extended qualification timelines and some inventory digestion.
Right now, our focus remains on driving efficiencies and keeping a close eye on our cost structure to ensure we continue delivering value to our stakeholders. We are very energized by the many opportunities we see heading our way.
UCT's longstanding leadership role in the semiconductor equipment manufacturing space will play a pivotal role in advancing the industry to new heights, in the coming years.
And, now, I'll switch to a review of our financial performance and outlook, where I will be referring to non-GAAP numbers only.
For the fourth quarter, total revenue came in at $563.3 million compared to $540.4 million in the prior quarter. Revenue from products increased to $503.5 million from $479 million last quarter, due to increasing demand for advanced packaging applications and other AI-related processes, including CMP, which offset some softening from the domestic China market. Services' revenue was $59.8 million compared to $61.4 million in Q3.
For the full year, total revenue was $2.1 billion compared to 1.7 billion in 2023.
Total gross margin, for the fourth quarter, was 16.8% compared to 17.8% last quarter. Products' gross margin was 15.2% compared to 16.1%. And Services was 29.8% compared to 30.5% in Q3.
Margins can be influenced by fluctuations in volume, mix, and manufacturing region, as well as material and transportation costs. So there will be variances quarter to quarter.
Total gross margin, for 2024, was 17.5% compared to 16.6% in the prior year.
Operating expense, for the quarter, was $55.3 million compared to $56.5 million in Q3. As a percentage of revenue, operating expense decreased to 9.8% from 10.5% in Q3.
For the year, operating expense, as a percentage of revenue, decreased to 10.6% from 11.6% in the prior year.
Total operating margin, for the quarter, came in at 7% compared to 7.3% in the third quarter. Margin from our Products division was 6.6% compared to 7%. And Services' margin was 9.7% compared to 10.1% in the prior quarter. The overall margin decrease was largely driven by higher mix of our Products revenue.
For the full year, operating margin increased to 6.9% from 4.9% in the prior year, due to higher overall revenue levels and increased efficiencies.
Our tax rate was 14.5% this quarter compared to 27.1% last quarter, as we finalize our full-year tax rate at 21.1%. Our mix of earnings between higher tax jurisdictions and lower tax jurisdictions can cause our tax rate to fluctuate throughout the year.
For 2025, we expect our tax rate to be in the low to mid-20%s.
Based on 45.4 million shares outstanding, earnings per share, for the quarter, were $0.51, on net income was $22.9 million, compared to $0.35, on net income of $15.9 million, in the prior quarter, primarily due to the lower tax rate and lower operating expense on increased revenue.
For the full year, earnings per share was $1.44, on net income of $65.2 million, compared to $0.56, on net income of $25.2 million, in 2023.
Turning to the balance sheet, our cash and cash equivalents were $313.9 million compared to $318.2 million in '23.
Cash flow from operations was $17.1 million compared to $14.9 million last quarter, primarily due to higher net income and a decrease in inventory.
For the full year, cash flow from operations was $65 million compared to $135.9 million in the prior year.
As mentioned earlier, the growth we saw last year, supporting AI-buildouts, should stay around current levels, with some ups and downs as the industry prioritizes its spending patterns.
We are seeing a reduction in demand from our domestic China customers, as qualification periods are taking longer than originally planned. And we presume they are consuming inventory purchased in 2024.
Recognizing these are likely short-term headwinds but with limited visibility and no clear indication that the industry is in full-recovery mode, we are taking a proactive approach to maintaining our profitability and long-term growth.
As part of this effort, we are conducting a comprehensive review of our expense structure and evaluating balance sheet alternatives to optimize financial performance.
We project total revenue, for the first quarter of 2025, between $505 million and $555 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.

Question and Answer Session

Operator

Ladies and gentlemen, we will now begin the question and answer session. (Operator Instructions)
Krish Sankar, TD Cowen.

Krish Sankar

I think (inaudible) a good question. I have a few of them, Sheri.
Number one, how much is this sales to China's semicap customers -- the MXP of techs of the world -- in the December quarter? And how much was it, in all of calendar '24?

Sheri Savage

Yeah. Generally, we were about $40 million for the Q4 timeframe. For the year, it was about $215 million.

Krish Sankar

$215 million?

Sheri Savage

Yeah.

Krish Sankar

Got it.
And, then, obviously some of them have been impacted by the export restrictions in December. Is that factored into your guidance?
And if you didn't have that restriction, what did March [weather] guidance have been?

Sheri Savage

No. That wasn't really factored in, at this point.
But I'm going to turn over to Chris Cook to answer a little bit more about China.

Chris Cook

Yeah. Thanks, Krish. Chris Cook here.
We have not factored that in. We've seen a very strong 2024, up through the end of Q3.
Then, we started seeing softness in Q4 that extends through the first half of the year, of 2025.

Krish Sankar

But, just to clarify, the softness and digestion you're talking about is more with your China's semiconductor customers, not your semicap customers, right?

Chris Cook

The semicap customers -- there was a combination of two factors. I think that we have a customer, in particular, that continues to have ramp issues, at one of their large customers.
But, in addition to that, we see, overall, softening in demand, partially due to just organic demand and, also, some build-up in inventory that is well known to have occurred through 2024.
We expect to see some recovery in the second half of the year, as we work through both those issues and start to get more visibility into greater demand.

Krish Sankar

Got you.
And, then, just one last question. I just want to check. Obviously, in December, we had that export control restrictions and some of your China semicap customers are on the entity list.
So I was assuming you cannot ship to them. But are you telling me you're still shipping to them? I'm just trying to wonder if there is a risk to that $215 million that you did last year, when you go into 2025?

Chris Cook

No. We're not affected by that. Of course, as you can imagine, we're all over those developments. But they did not impact our shipments, just given our footprint and how we manufacture and deliver those products, locally, in China.

Sheri Savage

Yeah. Krish, I'll add on, a little bit.
We've done extensive analysis surrounding our export control. And our shipments within China are encapsulated within China and with the manufacturing and engineering happening in China. So there's no back-and-forth between the US and China, at this point.
So as a result, that has allowed us to continue to ship to those specific customers.

Krish Sankar

Got it. All right. Thanks, Sheri. Thanks, Chris.

Operator

Charles Shi, Needham.

Charles Shi

Hey. Good afternoon.
I think, so far, I heard three, probably three independent issues related to China For China business.
One, a little bit customer-specific -- seems like one customer has some qualification on ramp issues. Two, you also mentioned that there seems to be some softening of the China demand. But, three, I think you said that there's a little bit of inventory excess that your Chinese customers are carrying, right now.
But the third one, I'm not exactly surprised because you, guys, were pretty transparent, last year, by saying you thought that some of the customers may be doing a little bit of stockpiling.
But can you rank-order -- among the top three -- which one are the ones that are causing most of the near-term air pockets? And, really, just want to understand that, relative to, let's say, a quarter ago? What has changed?
Thank you.

Chris Cook

Yeah. By the way, thank you, Charles. This is Chris Cook.
And I would rank those in order as you described them, actually.
The customer-specific ramp issue that we expect to be resolved in the second quarter was a hit. Followed by a blend of the inventory and demand corrections that we see.
Obviously, to the extent that our customers burn through that local inventory that shows up in reduced demand, for us, and excess inventory burn.
So it's a combination of those three, in that order.

Charles Shi

Got it.
So, let's say, if you take out that China For China business, what would the guidance be like, for the ex-China business, from Q4 into Q1?
Do you still see sequential growth? What's the picture there?

Chris Cook

I would say we're not growing sequentially. We're off.
And as we expect those things to be resolved, we do expect for recovery in the second half. But we'll continue to see softness through the first half of the year.

Charles Shi

No. Chris, I mean the ex-China business, the non-China business.
I was trying to ask, yeah, from Q4 to Q1, what's embedded in your guidance? Are you sequential growth (multiple speakers)?

Chris Cook

Yeah. Sorry. I misunderstood the question.
Yeah. We're flattish.

Charles Shi

Okay.
Maybe the last one for me. The gross margin for Q4. Seems like they implied the gross margin guidance in Q1. Obviously, you don't really guide the gross margin.
I heard you talk about Products versus Services, makes -- seems like a little bit lighter than you thought. But the Product growth margin, alone, looks like a little bit lighter as well.
What's the reason for that, that gross margin -- the weakness in the Products division?

Sheri Savage

Hi, Charles.
Yeah. Really, the key thing is the mix of the products that got shipped and where they got shipped from.
So, obviously, with China being a little bit lower, we started to see that in Q4. And that's a high-margin business. But we also saw some of our other higher-margin products be a little bit lighter, for the quarter.
Also, being at year end, we did have some additional expenses surrounding, just chewing up some of our inventory and things like that. So that's what really affected it.
We see it somewhat flat going into Q1. And we will continue to be looking at our cost structure, with a close eye -- make sure that we continue to help that, as we move through the year as well.

Charles Shi

All right. Thank you.

Sheri Savage

Thanks.

Operator

Christian Schwab, Craig-Hallum Capital Group.

Christian Schwab

Great. Thanks.
Sherry, I think you implied --
Anyway, so the second half is stronger than the first half but you implied flattish-type of revenue. I didn't know if you're implying for the year.
So if we take flattish revenue in the first half and pick it up in the second half, are you assuming, then, that revenue year over year, '24 to '25, is flat-ish? Is that what you were trying to say?

Rhonda Bennetto

I think we're assuming, right now, that the first half is somewhat flat. We obviously don't have a crystal ball and don't know the second half.
But I think we're basing it on everything else that everybody else is putting out there -- that, hopefully, the second half is a little bit higher. But, obviously, we'll continue to track that, quite closely. And look at our cost structure, as we move through that.
But, for now, we think the first half is going to be somewhat flat.

Christian Schwab

Okay.
And, then, as far as, like, the AI growth drivers that you mentioned, is there one segment or another, inside that value chain, that is more important to you, where you have design wins with leading customers in the United States that would more possibly impact your revenue versus a growth in another?
In other words, is leading-boundary logic, [node-shrink], a big deal? And high bandwidth memory, et cetera.
What should we be monitoring to see if it shows up in your business, if it shows up elsewhere?

Cheryl Knepfler

Hi, Christian. This is Cheryl.
Obviously, we've seen a benefit from the high bandwidth memory, both from the packaging side as well as from the expansion in DRAM.
So we can continue to see that as a contributor. And we also see the transition for Gate-All-Around and the transition to 2 nanometer, as a benefit to us, as well as those higher deposition and itch than the previous node.

Christian Schwab

Great. All right. Perfect. No other questions. Thank you.

Sheri Savage

Thank you.

Operator

Edward Yang, Oppenheimer.

Edward Yang

Hi.
Sherry, you mentioned a comment about balance sheet alternatives. I was wondering if you could clarify that.

Sheri Savage

Yeah. We're just -- obviously, the market has been pretty open with being remaining open, from a debt and equity perspective, for us, in general. But we are continuing to look at our capital structure.
We want to have flexibility with our working capital. Obviously, making other M&A potentials in the future and increasing our cash flow through lower interest rates.
So we're just really taking a look at different options just to be able to add more to our balance sheet, as well as for our shareholders to have more EPS going through.
So we're just taking a look at the options.

Edward Yang

Okay.
And, China, you mentioned, for the year, was $215 million of revenue. So [back] into $44 million of fourth-quarter revenue for your China For China business. Is that the sustainable run rate that you see for the first half? Or were you exiting at a lower run rate than that $44 million you saw in the fourth quarter?

Sheri Savage

We see it being a little bit lower going into Q1 and staying somewhat flat there for Q1, Q2.
And, as Chris mentioned, it would, hopefully, recover, somewhat, in the second half. Maybe not to the peak levels that we saw but seeing it going back up in Q3, Q4.

Edward Yang

Okay.
And just final question. Back in January, you'd updated your view on WFE growth and was looking to outperform that by about 5% to 10%. And so, has that changed? What's your updated WFE? And what would the range of outperformance be, at this point?

Cheryl Knepfler

So for WFE, at this point, we're looking at about 5 points of growth in 2025. And we are looking to outperform.
Obviously, last year, we outperformed quite a bit. So with, potentially, having a little bit pulled in, with the upheavals in the US, we may see a little bit of balancing of that across the two years. So we will continue to look at that.
Our target is to outperform by 5% to 10%. We certainly believe that's a possibility. But we will continue to have to monitor the mixes across the various products.

Edward Yang

All right. Thank you.

Sheri Savage

Thank you.

Operator

There are no further questions, at this time.
I'd like to turn the call over to Sheri Savage for closing remarks. Ma'am, please go ahead.

Sheri Savage

Thank you, everyone, for joining us today.
We will talk to you, again, next quarter.
Thanks a lot.

Operator

This concludes today's conference call.
Thank you very much for your participation.
You may now disconnect.