Good afternoon, and welcome to the Ultra Clean Fourth Quarter and Full Year 2017 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Rhonda Bennetto, Investor Relations. Please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining us for our fourth quarter and full year 2017 earnings conference call and webcast. 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 with the financial review, after which we will open up the call for questions. The press release we issued earlier this afternoon, along with the information about the webcast and how to access a replay of this call, can be found on the Investor Relations section of our website at www.uct.com. Today's call may contain forward-looking statements, including the company's views regarding future financial performance, new capabilities on orders, shipments and industry growth. Investors are cautioned that forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those results listed here. Information concerning these risks and uncertainties is contained in our periodic filings with the SEC, including our most recent Form 10-Q and 10-K and in the press release relating to today's call. All forward-looking statements are based on management's estimates, projections and assumptions as of today, and UCT assumes no obligation to update them after today's call. Also on today's call, we will be referring to non-GAAP adjusted financial measures and reconciliations to GAAP measures can be found in today's press release. And with that, I'd like to turn the call over to Jim. Jim?

Thank you, Rhonda, and good afternoon, everyone. 2017 was an incredible year of growth for the semiconductor capital equipment industry and an historic year for UCT. The race to deliver solutions that enable next-generation 3D devices drove the way for fab equipment industry to new highs. Our proven ability to custom design, manufacture and deliver on time continues to increase our position in critical content on our customers' platforms. By expanding our operations and manufacturing in Asia, while effectively managing our global cost structure, revenues from outside the U.S. grew by 83%. We significantly outperformed the markets we serve and vastly improve the quality of our earnings. In 2017, our revenue and earnings grew to the highest levels in the company's history. Total revenue climbed 64%, driven by 69% growth in our semiconductor equipment business and continued strength in our display equipment business. By focusing on operational efficiencies and leveraging our existing infrastructure, we performed at the high end of our target model and increased our non-GAAP earnings power by 260%, which grew 3x faster than the revenue. For the fourth quarter, total revenue rose an impressive 43%. Semiconductor revenue climbed 51%, and revenue from outside the U.S. grew 55% over the same period last year. With our ability to flex our production to meet demand, non-GAAP earnings per share followed suit, up 64% over the prior year. The fourth quarter was a strong finish to an extraordinary year of record performance as UCT, again, significantly outperformed WFE growth. The rise of smaller, lighter and more portable devices such as tablets, smartphones, the proliferation of IoT devices and the infrastructure to support them is pushing the wafer fab equipment industry to new highs. Our research, backed by recent bullish commentary from industry peers and customers, leads us to believe 2018…

Thanks, Jim. In today's discussion, I will be referring to non-GAAP numbers only. 2017 was an outstanding year for UCT. Total revenue reached a record high of $924.4 million, growing 64.3% over last year. Both semiconductor and non-semiconductor businesses saw solid momentum year-over-year, increasing 69% and 20.3%, respectively. As we continue to optimize operations at these volumes, the leverage of our business model led to significant gains in earnings power. For the year, our operating margin almost doubled to 10.3% from 5.4% in 2016 and non-GAAP EPS reached a record of $2.34, growing 3x faster than revenue and more than doubling that of 2016. For the year, we generated $48.9 million in cash from operations, far surpassing the $17.6 million generated in 2016. Now let me turn to fourth quarter results. Total revenue for the fourth quarter was $248.9 million, an increase of 2.6% from the prior quarter. Semiconductor revenue grew to $235.3 million, a sequential increase of 5.8%. As a percentage of total revenue, semiconductor increased to 94.5% from 91.7% last quarter. Revenue from outside the U.S. reached a new high of $139.4 million compared to $132 million in the third quarter, demonstrating the advantage of being strategically located close to our customers. Our non-semiconductor business for the quarter was $13.6 million, accounting for 5.5% of total revenue compared with $20.2 million or 8.3% last quarter. This was due to the typical fluctuations of our non-semiconductor business. Gross margin for the quarter was 17.7%, near the high end of our targeted range of 15% to 18% and roughly flat with the prior quarter. Fourth quarter operating expenses increased to $20.4 million or 8.2% of revenue from $18.2 million or 7.5% in the third quarter. This resulted in operating margin for the fourth quarter of 9.5%, at the higher end…

[Operator Instructions]. The first question comes from Edwin Mok with Needham.

So first question I have is, if you go back to look at '17, it was a really strong growth year in semi, especially in the middle of the year when you guys won or start to shift that yield module win you had with one of your customer and that resulted in the kind of sequential growth we saw every quarter, right, for '17. I'm just curious, how do you kind of view your pipeline for this year? Do you think you might have another win that might come ramping sometime this year? Or was it more progressive this year? Any way you can talk about your kind of design wins that you have secured and your pipeline on that, it'd be helpful.

Yes, Edwin. Yes. Obviously, we see '18 overall as a very strong year, just from WFE growth. On top of that, we continue to expect the continued pipeline as we win more business and outgrow the market. The conditions haven't changed. There hasn't been a lot of added capacity by our customers, if any. And so all the same variables are in place. So we expect to continue to outgrow WFE through '18.

So you guys are working through a pipeline. There are some wins that might start to ship this year?

Yes. There is always a pipeline and, of course, that fluctuates over time. But yes, we continue to have a pipeline of new products and new wins.

Okay. That's helpful. And then on non-semi, this quarter, it declined sequentially. Is there a way to kind of think about how -- actually, let me start with this, what drove the decline? And as we go through -- and then what's baked in your first quarter guidance? And as you go for '18, how do you kind of think about the non-semi business?

Yes. I wouldn't use the word decline. As we've stated many times, it's a very lumpy business and it fluctuates around a very large range. And so there is nothing fundamentally different. We continue to see a lot of strength in that area. We continue to have a very strong position. Nothing has changed around our position in the display area. And it just tends, by its nature, to be within a quarter-to-quarter very lumpy. And we don't guide out quarter-by-quarter to that part of the business, but everything is in a very good position there. We continue to see -- I think as you've heard Applied talk and others that we continue to see a lot of strength in that area through '18.

And then on the margin front, Sheri, just to be very clear, you expect your operating margin at the high end of your guidance range this quarter of 8% to 10%. Assuming revenue stays at this level or similar level, do you think that's kind of a sustainable operating margin range long term in terms of the high end of that -- I think last quarter, you guys did 9.5% of equity towards the high end of that. How do you kind of think about that longer term?

Yes. I think that our margin -- target margins are really -- we're really comfortable with that 8% to 10%, especially on the operating margin and 15% to 18% for the gross margin. So I think we feel good about those ranges. And with these levels, we still continue to see us in those target ranges.

Last question I have just, I guess, a candid question. Why is the tax rate increasing to 14% to 16%? What drove that?

Yes. With the new tax rate that's coming in from a corporate perspective in the U.S., it's approximately 21% versus the 30-some-odd percent that we had before, but we had a valuation allowance that was in place before. So our U.S. tax rate was incredibly low, if not zero. So as a result with the change in legislation, we released part of our valuation allowance. And so now we are back into a position where we have to actually pay U.S. tax on a quarterly basis. So that raises the tax rate up a little bit as a result.

Okay. Great. Yes. Sorry, I didn't catch your comment about the valuation loss on your prepared remarks. Okay. That's all I have. That's it.

Okay. Thanks, Edwin.

Thanks, Edwin.

The next question comes from Christian Schwab with Craig-Hallum Capital Group.

Jim, would you expect to outgrow the wafer front end industry growth in 2018, like you did in '17?

Yes.

Excellent. That's the most important question. And then just a question that I've received from investors regarding the recent equity raise and the question about that versus maybe doing something with that. Maybe just want to take this opportunity to answer that question, so I don't have to any more.

Yes. Definitely, Christian. The equity raise is part of our overall strategy to strengthen the balance sheet and grow the business over 2018, which obviously we're looking quite heavily at growth via M&A as well as organic growth. So one of the key things was, obviously, strengthening our balance sheet, making sure we had enough cash, so that if we wanted to make either a larger acquisition or something that was quick in nature, that we took away kind of some of the financing risk and allowed us to make those kind of acquisitions very quickly. But really having a strong balance sheet is setting us up to be in the best position to make an M&A transaction.

The next question comes from Karl Ackerman with Cowen.

If I could first just focus on just the road on outlook for 2018 and maybe ask this in a different way. Given your very strong guidance for the March quarter and the increased visibility on lead times, I think you've mentioned over the last few quarters, I was hoping you could elaborate on your expectations for maybe first half versus second half this year, just given the very robust WFE levels we should see for 2018. And I have a follow-up, please.

Yes. Obviously, Karl, the first half is going to be strong, especially with the quarter, and we have visibility into the second quarter. So we feel very comfortable with the overall year and, of course, with the first half. The two quarters out, the forecast from our customers get a little murkier, so it's hard. We don't guide there. And one of the reasons why we don't guide that far out is because we don't have enough bottoms-up information to do that. But we remain overall very confident in the fundamentals of the market, the end market, the way downstream. And our customers have also been very confident in the whole of 2018 being another very strong and an up year. So obviously, we feel very good about the entire year. Obviously, a big step-up in Q1, which we're very excited about, and obviously, we see that strength continuing. As you remember, we went into '17 and it was front-end loaded and there was concern about the back-end of '17. And as the year went on, that continued. As we got more visibility, that went away. So we hope the same thing will happen in the back half, but we just don't have that visibility.

Understood. I guess, for my follow-up, it's a multipart question. So I guess, I'll break it down. First is more just a housekeeping question. Could you elaborate why inventory rose, I think, 40% sequentially this quarter? Because it appears to be growing at a faster rate than sales for the March quarter. And I guess, as a follow-up to that, I wanted to focus more on capital allocation. And how do you think about the trajectory of free cash flow for this year, particularly around areas you can control like working capital? And secondarily, going back toward your M&A comments, how much cash do you need to run the day-to-day operations of the business? And what degree of leverage is comfortable for you, as we think about the opportunity to invest on an inorganic basis?

You're right. That was a multipart question. Let me see if I could start. In the inventory, we control and keep a close eye on our working capital. And the process is, we're doing that very tightly with our customers. So our inventory levels and our working capital is hand-in-hand with the demand that we see from, again, a bottoms-up view. That's how we operated through '17, and we performed very well and it put us in a great position to really capitalize on that demand. So we're very tight. And inventory, obviously, the quarter, Q1 is going up pretty dramatically and it's never going to be a percent for percent. Things don't fall always nicely within a quarter. So the inventory is going up. It's actually a positive sign of the near-term demand that we're seeing. Second part of the question, I think, was for Sheri.

Yes. So you asked about free cash flow. So obviously, we did have a pretty good free cash flow generation for 2017 versus previous years that we've had. And depending upon, obviously, what happens during the year, if we continue to see a strong year throughout the year, I would see us being able to generate continued amount of free cash flow. We're very careful with how much we spend from a CapEx perspective. We are making an investment in SAP that we've talked about before, but beyond that we generally spend about 1% to 2% of revenue on CapEx on a yearly basis. So as a result, we're a pretty low capital-intensive business, in general. From a leverage perspective, it would depend on -- I think we could take on more leverage. It would depend on the size of acquisition that we'd want to make. And I think that's something that we would decide over the course of the year depending upon the M&A, but obviously, I think we could take on more. We have a very conservative balance sheet, in general. And we're really setup to make acquisitions very easily now with the financing that we did and could make additional acquisitions with debt. But the key thing is really having the return to our shareholders with the acquisitions that we make.

The next question comes from Patrick Ho with Stifel, Nicolaus.

Jim, maybe first off, in terms of some of the acquisitions you've made to date, which include Marchi and Miconex. Obviously, the industry environment is driving a lot of the gas panel delivery system sales that you're seeing today. Can you describe some of those acquisitions and how they've expanded during this current upturn? And whether you're expanding them into new customers during this period that's helped you, I guess, outpace the overall WFE growth rate?

Yes. Thanks, Patrick. Yes. Those two acquisitions have been highly successful. I would call it not expanding to new customers, but penetrating further within the customer base where we already had a presence. Especially taking the Marchi acquisition, I think that, as we had mentioned, is very heavily gas panel-based. And so that has a handful of customers that are utilizing a lot of gas panels. And so as we've been able to expand our share in that area and do quite well with those businesses, we went into '17 and the latter half of '16 wanting to do more of those because they were so good. But we saw such dramatic organic growth in front of us that we really stayed and focused on executing on an incredibly huge step function in our revenue. But now, obviously, we continue to see organic growth going forward, but we see that we're going to have more bandwidth to continue to do some of these great acquisitions that we did in the past.

Great. That's helpful. And maybe as my follow-up question for Sheri, in terms of the gross margin, specifically. You're at the high end of your target, the 15% to 18% range. Given the current environment and the revenue levels today, is revenue and, I guess, absorption be the biggest variable today? Or is there other variables that can swing gross margins one way or the other such as product mix or anything else that you may be able to detail?

Yes. I mean, I've talked about it before. I think product mix definitely plays into it as well as obviously, where it's being shipped out of from a geographic location. But the volumes definitely have helped us be at the higher end of our margin range. And with these volumes, I think that we'll be able to see that, especially on the operating margin perspective, just because we -- as I talked about in the past, we have not grown our OpEx as quickly as our revenue. Just over the course of this year alone, OpEx grew from 16% to 17%, 27%, whereas our revenue has grown 64% and our margin has -- our op margin -- or our profits have grown greater than 200%. So we've had a lot of growth, but we've not taken up our OpEx quickly. So as a result, you're going to see the leverage in the op margin area continued.

So I just want to make it clear. So a lot more this kind of expansion that we're seeing today is more on the operating margin side than maybe at the gross margins, which are at the high end of your levels today?

Correct.

This concludes our question-and-answer session. I would like to turn the conference back over to Jim Scholhamer for any closing remarks.

Thank you, everyone, for joining us today. We appreciate your time and look forward to updating you on our Q1 earnings call.