Ultra Clean Holdings (UCTT) July 25, 2024, Earnings Call Summary

Future Price Projections

Participants:

• Rhonda Bennetto – Senior Vice President, Investor Relations
• Jim Scholhamer – Chief Executive Officer
• Sheri Savage – Chief Financial Officer
• Cheryl Knepfler – Managing Director of Marketing
• Krish Sankar – TD Cowen
• Charles Shi – Needham & Company
• Christian Schwab – Craig-Hallum Capital Group

Summary:

Jim Scholhamer, CEO:

Q2 Financial and Operational Highlights:

• Revenue and Earnings: Revenue and earnings for Q2 2024 were at the high end of guidance, showcasing strength in both products and services across all geographies.
• Key Markets: Significant growth in the domestic China market, especially among customers supplying high-bandwidth memory and equipment for advanced AI applications.
• Industry Engagement: UCT’s broad engagement in the semiconductor ecosystem and technical and operational capabilities have positioned the company to capitalize on AI advancements and elevated demand for high-performance chips.

Industry Trends:

• AI Revolution: AI servers and AI-enabled devices are driving increased semiconductor content, spurring industry investment.
• Industry Recovery Indicators: Key metrics like inventory rebalancing, increased shipments of high-performance computing chips, favorable memory pricing adjustments, and increased wafer fab capacity point to an industry recovery, potentially starting later this year.
• Future Outlook: Wafer fab equipment sales are projected to grow by mid-teens in 2025, driven by demand for leading-edge technology, new device architectures, and capacity expansion.

Operational Strategy:

• Site Optimization: The site optimization strategy is on track, with a focus on shifting production to lower-cost regions, doubling revenue from the Malaysia facility compared to Q4.
• Capacity Expansion: Investments in capacity expansion and operational efficiency support customers’ innovation roadmaps and next-generation technology manufacturing.

Sheri Savage, CFO:

Q2 Financial Results:

• Revenue: Q2 2024 revenue was $516.1 million, up from $477.7 million in Q1. Product revenue increased to $452.7 million from $418.5 million, and services revenue was $63.4 million, up from $59.2 million.
• Gross Margin: Total gross margin was 17.7%, slightly down from 17.9% in Q1. Product gross margin was 15.6%, and services gross margin was 32.7%.
• Operating Expenses: Operating expenses were $55.8 million, a slight increase from $54.5 million in Q1, but operating margin improved to 6.9% from 6.5%.
• Earnings Per Share: EPS for Q2 was $0.32, up from $0.27 in Q1.
• Cash and Cash Equivalents: Ended the quarter with $319.5 million in cash, compared to $293 million in Q1. Cash flow from operations was $23.2 million, up from $9.8 million.

Projections:

• Q3 Revenue and EPS: Projected revenue for Q3 between $490 million and $540 million, with EPS ranging from $0.22 to $0.42.
• 2024 Tax Rate: Expected tax rate for 2024 in the low 20s due to growth in higher tax jurisdictions like China and the Czech Republic.

Q&A Highlights:

Krish Sankar (TD Cowen):

• China Market: Strength in domestic China market expected to continue, with orders from Chinese semiconductor companies increasing significantly.
• HBM and AI Demand: High bandwidth memory (HBM) and advanced AI packaging are key growth areas, with significant demand expected to continue.

Charles Shi (Needham & Company):

• China Business Trends: Strong business in China expected to persist, with diversified business helping to sustain growth.
• HBM and Advanced Packaging: Continued strength in HBM and advanced packaging, with potential for further upside in 2025.
• Litho Business: Increasing demand in lithography, with expectations for solid business growth moving forward.

Christian Schwab (Craig-Hallum Capital Group):

• WFE Growth Projections: Wafer fab equipment (WFE) growth expected to be in the mid-teens, potentially leading to revenue levels approaching 2022 figures by 2025.
• Market Recovery: Signs of market recovery and potential for significant revenue growth as industry conditions improve.

Analysis of UCTT’s Historical and Projected Performance:

Historical Performance (2009-2023):

• EPS Trends: UCTT’s earnings per share (EPS) have experienced significant volatility over the years, with notable highs and lows. For example, EPS peaked at $2.75 in 2021, reflecting strong performance, but dropped to -$0.70 in 2023 due to market challenges.
• Stock Price Movement: Correspondingly, UCTT’s stock price has fluctuated. In 2021, the stock price soared to $57.36, but fell to $14.14 in 2023, highlighting market sensitivity to earnings performance.
• Revenue Trends: Revenue growth has been inconsistent, with substantial increases in some years (e.g., 887.5% growth in 2020) and declines in others (-27% in 2023).

Projected Performance (2024-2027):

• EPS Projections: Analysts project strong EPS growth in the coming years, with significant increases expected in 2024 ($1.40) and 2025 ($3.13), reaching $7.20 by 2027.
• Stock Price Forecast: Using the historical PE ratio, the projected stock price could reach $47.36 in 2024 and potentially $191.82 by 2027, reflecting a 529% increase from current levels.
• Revenue Growth: Revenue is expected to grow steadily, with projections indicating a rise to $2.01 billion in 2024, $2.52 billion in 2025, and $3.20 billion by 2027.

Conclusion: Ultra Clean Holdings is positioned to capitalize on the semiconductor industry’s recovery and AI revolution. With robust financial results, strategic investments, and a diversified market approach, UCTT is well-prepared for future growth. The projected performance indicates significant potential for investors, making it a compelling opportunity in the semiconductor sector.

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