Good day, and welcome to the Ultra Clean Technology Q2 2023 Earnings Call and Webcast. [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, operator. Good afternoon, everyone, and thank you for joining us. With me today 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, and 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 Jim. Jim?

Thank you, Rhonda, and good afternoon, everyone. Thank you for joining us today. I'll start with a recap of our second quarter performance and provide some commentary on current and long-term industry dynamics before turning the call over to Sheri for a detailed financial review. Then we'll open up the call for questions. During the second quarter, the semiconductor industry remained challenged in certain segments, while other areas remained strong. Trailing edge, servers and China ordering and taking delivery of tools were bright spots. However, PC and consumer end markets that rely on advanced memory and foundry/logic spending remained weak. Headwinds included elevated inventory levels across the supply chain, macroeconomic and geopolitical instability, including interest rates, fears of recession, inflation and export controls, all of which are likely to influence our industry for a few more quarters. Product mix and lower utilization at some sites on reduced revenue were the overriding factors that affected our second quarter results. UCT's legacy Products business performed as expected in this dynamic environment with some adjustments to orders but no notable push-outs or cancellations. Although a small percentage of our total Products revenue, our non-semi business saw some unexpected volatility in the second quarter, particularly in the process technology space, where we supply semi-like parts to non-semi businesses in display, industrial and medical. And lastly, our Service business declined from the first quarter as some customers adjusted their schedules to realign with ongoing end market weakness. As anticipated, the cost reduction initiatives we introduced earlier this year have begun to materialize in our financial results. Inventory decreased and OpEx trended down, resulting in healthy cash flow. Footprint optimization and site efficiencies to adapt to current demand while preparing for the ramp are on track but are much larger in scale, so take time for…

Thanks, Jim, and good afternoon, everyone. Thanks for joining us. In today's discussion, I will be referring to non-GAAP numbers only. As Jim noted, Q2 remained a challenging period in the semi cycle as companies work to reduce and rebalance inventory levels on weak end demand while navigating persistent macroeconomic and geopolitical headwinds. Total revenue for the second quarter came in at $421.5 million compared to $433.3 million in the prior quarter. Products division revenue was $362.5 million compared to $368.6 million last quarter. And revenue from our Services division was $59 million compared to $64.7 million in Q1. Total gross margin for the second quarter was 16.7% compared to 17.3% last quarter. Products gross margin was 14.5% compared with 14.7% in the prior quarter and Services was 30.3% compared to 31.7% in Q1. The reduction in margin is due to lower volumes, driving decreased efficiencies. As we continue to optimize our footprint and increase efficiencies, we expect to see incremental improvements in gross margin. However, as Jim noted, these initiatives are complex and larger in scale. Therefore, it will take some time for the benefit to be fully realized. Operating expense for the quarter was $49.4 million compared with $52.7 million in Q1 and decreased as a percentage of revenue to 11.7% compared to 12.2% in the prior quarter as some of our initial cost control initiatives began to materialize. Total operating margin for the quarter was relatively flat from the prior quarter at 5% compared to 5.1% in the first quarter. Margin from our Products division was 4.3% compared to 4.1% in the prior quarter, and Services margin came in at 9.3% compared to 10.8% in the prior quarter. The fluctuations in margins were mainly due to decreased efficiency on reduced volume partially offset by lower operating expenses. Efforts are ongoing to align our cost structure with current demand levels. Based on 45 million shares outstanding, earnings per share for the quarter were $0.16 on net income of $7.1 million compared to $0.17 on net income of $7.6 million in the prior quarter. Our tax rate for the quarter was 16%. We expect our tax rate for 2023 to stay in the mid- to high teens. Turning to the balance sheet. Our cash and cash equivalents were $320.8 million at the end of the second quarter compared to $322.1 million last quarter. Cash from operations increased to $36.4 million compared to $28 million in the prior quarter driven primarily by the reduction of inventory and management of cash flows -- cash outflows. As we navigate through the current cycle, we will continue to manage our working capital to ensure sustained financial stability. During the quarter, we purchased 337,000 shares at a cost of $9.5 million. For the third quarter, we project total revenue between $405 million and $455 million. We expect EPS in the range of $0.08 to $0.28. And with that, I'd like to turn the call over to the operator for questions.

[Operator Instructions] Our first question comes from Krish Sankar with TD Cowen. Please go ahead.

Thanks for taking my question. Jim, the first question I had is I understand you said revenue profitability to bounce around these levels for the next few quarters, which kind of makes a lot of sense. I'm just trying to triangulate this with some of your customers have spoken about, reducing their inventory level. So how do you like kind of handicap that given the fact that as they reduce their inventory level, it's kind of a slight negative for you in the short term? And then I have a couple of follow-ups.

Okay. Yes. Absolutely. I think we've been pretty consistent the last few times we've gone on these calls. There is a significant amount of inventory and also deferred revenue that is between us and our customers. So we are seeing -- as we guided up a bit in the next quarter, we are seeing a little bit of improvement, but there is still -- after the great supply chain, post-COVID crisis, we saw inventory levels that were really kind of levels that we haven't seen in a long time. So that is the reason why we're kind of being somewhat conservative in our approach and that it's going to take another few quarters to clear this out. However, we're -- I think we're optimistic that things could get -- will probably get better before they get worse.

Got it. And then I had one other question for you and then one for Sheri. Jim, the second question for you is I remember in the past, you've kind of shifted some of the China semi-cap companies like AMEC or Piotech or whatever it is. I'm just kind of curious, are these -- can you still ship to them? Are they still part of your customer base? Any color there would be helpful. And then I had a follow-up for Sheri.

Yes. We have been able to ship to them on more of the trailing edge investment that's going on in China. So we have seen some pretty good movement there. It actually was relatively strong. So we were initially concerned that it was kind of inventory hoarding because they were afraid of new restrictions. But I think we've now confirmed that they're actually just seeing more business at the trailing edge. So we've actually seen our business with AMEC and Piotech continue to be strong.

Very helpful, Jim. And then a final one for Sheri. You've done a really good job at managing the cost during this challenging time. If the revenues to these levels -- I guess, mentioned profitability should be around these levels, too. How easy is it to scale up or scale down if things get worse or better from here onwards?

Yes. No, I mean, we have certain cost initiatives in place. So for a scale-down, we're ready to go on that, and we are continually looking at our cost structure. Scaling up is -- sometimes can be actually just as hard because trying to hire people quickly and making sure that we have enough capacity, etcetera, in place to be able to manage customer demand is quite key. So we're looking at both really because both Jim and I feel that this could turn on very quickly when it does so -- and that's what our experience has been. So we will continue to almost look at both scenarios to make sure that we can react to either.

Our next question comes from Quinn Bolton with Needham & Company. Please go ahead.

Jim, I guess, I just wanted to follow up on Krish's question. Lam last night talked about canceling POs to a number of its component vendors, and in the near term, they were having to take some excess component inventory to cancel those orders. But it certainly made it sound like beyond the September quarter, they may be taking significantly lower deliveries from component vendors to try to work down the inventory. And I guess, one, are you seeing that? And two, is that sort of incorporated in your outlook for sort of stable revenue through the -- certainly, year-end and maybe even into early next year?

So one, we have been seeing that actually for Q1 and Q2. We have been dealing with that. And there are a lot of puts and takes, but they have an inventory isn't always what they need for whatever is being ordered. So obviously, they're still ordering things. And that's why when I say flattish for the rest of the year, bouncing around these levels, maybe up a bit, we've already taken that -- to your second question, we've already taken that into account, but we do think there is opportunity for upside as these things start to clear out.

Got it. Thanks for that additional color. And then I guess, in terms of your Services business revenue, looks like it was weak just as utilization rates have been throttled back. Based on the latest information you have, do you think those utilization rates are now at sort of a trough level in the Services business, may start to see a rebound in the second half of the year as utilization rates begin to recover? Or do you think we're going to stay at this lower utilization rate and therefore, Services revenue in the second half is probably going to be around that $59 million level that you saw in Q2 for the rest of the year?

Yes, Quinn. So I would say -- I would characterize it as we don't imagine them going any lower. We've certainly seen weakness in Korea, which we hadn't seen until the second quarter. Korea had remained strong in the first quarter. We've seen a lot of delays on node changes over in North America. And if I were to characterize it, we're assuming it doesn't move -- would definitely -- we can't see it moving down from this level. We're assuming it's going to be flat, maybe slightly up, but we think there might be some potential for it to move up a little bit more by the end of the year.

Excellent. And then, Sheri, the gross margins at 16.7% seem to be a little bit lower than what we were thinking without a meaningful change in the revenue. So I guess anything in particular to call out? Was there a particular mix shift? It looks like both Product and Service margins were lower this quarter. Just wondering, when do you think -- do you think margins kind of stay at these levels to the extent that revenue is flattish? Is sort of a flattish gross margin the right way to be thinking about gross margin until revenue recovers?

Yes. I think the key thing that affected this quarter was really the Services side, as you mentioned earlier. Obviously, that has a very nice margin profile. So as a result of that, that really assisted with the margin coming down a little bit as well as our Ham-Let Fluid Solutions business was also lower than anticipated. So those feed into the overall margin on the Products side, the Fluid Solutions/Ham-Let and then obviously, Services. So I think as we start to see those recover over the course of the year, as Jim mentioned, surrounding Services, we should be able to see some of that margin come up as a result of that, along with the fact that we have cost initiatives in place that we're looking at as well to hopefully affect that, depending upon how long this cycle goes, so that we can ensure that we manage our margin as we move forward.

Our next question comes from Christian Schwab with Craig-Hallum Capital Group. Please go ahead.

I guess more on the more optimistic side when we come out of this. We have a very large footprint that you expanded in Asia during the upturn. Should we assume that you're out there aggressively looking to capture market share? These cycles always run the same. We order too much. We take a pause and then all of a sudden, as you talked about, it turns on faster than people think and everyone's scrambling again, inventory correction to strong growth. So should we assume on the back side of this that you think you might have aggregate -- more market share than you did going into the downturn? Or should we not think that?

Yes. Christian, yes, so -- yes, you've followed us a long time. So we've picked up market share on both the upside and the downside. And I could say in almost all accounts, we're holding share or improving share even during this down cycle. And I think a big part of that is many of the OEMs are making a much stronger move to Southeast Asia, where we've really set ourselves up really well. So we are seeing a lot of new program wins that were -- and these things take two, three quarters for a program win to show up as revenue as you move these things over to those sites. So we are doing really well in that stage. We're a little bit -- we're kind of heavier in etch and heavier in CMP and other areas. We're doing well in litho, which is doing really well, as you know, for WFE, but we don't have the biggest footprint there yet. So we're a little bit disadvantaged right now when you look at total WFE because the segments where we're stronger are down a little bit. But if you look at program and market share wins, we're actually doing very, very well. And I think one other point -- not to run on, one other point to make is, as part of the cost reductions that we're doing as we're consolidating and moving factories that are that -- we're kind of doing two things at once, and this has been our playbook for many years. So we're moving factories into like one larger location so that we'll actually end up with more capacity but more efficiency by moving these factories together in like Texas and in Arizona as well as in Malaysia. So we've kind of got a double playbook of getting more efficient in our factory space, at the same time, increasing our capacity for the next big run-up. So yes, I mean, a short answer to your question is we're doing really, really well in our accounts.

Great. And then, Jim, looking at the upturn in the CHIPS Act here in the United States and some of your very large customers expanding manufacturing capacity here. Do you think you'll get any government funds to help in expanding or growing different facilities where the customers want them, in Texas, for example.

Yes. Not in the near term. The money hasn't really been -- we have people working on this, but the money has not been allocated towards the supply chain yet. And those investments, it's been more R&D or large fabs. So we have not been able to see any of that. But I think downstream, when Intel goes into Ohio and we build a fab in '25 or '26 to service them, for example, I think that will be where our opportunity is. But right now, the CHIPS Act is not benefiting subsuppliers in any way. So -- but it's definitely something we are looking into.

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

So thank you, everyone, for attending today's conference call, and we look forward to speaking to you again next quarter.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.