Good afternoon, ladies and gentlemen, and welcome to the Ultra Clean Technology UCT First Quarter 2021 Earnings Call and Webcast Conference Call. [Operator Instructions] This call is being recorded on Monday, May 6, 2024. I would now like to turn the conference over to Rhonda Bennetto, Senior Vice President of 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, 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?

Hello, everyone, and thank you for joining our call this afternoon. I will start with a high-level summary of our financial and operating results for the first quarter then share some thoughts on the broader industry and trends we are seeing. I'll close by highlighting a couple of important awards before turning the call over to Sheri for a more inclusive financial review before opening the call up for questions. We reported a solid first quarter on the top and bottom lines. The increase in orders above midpoint was driven by ongoing strength in the domestic China market and High Bandwidth Memory and advanced packaging demand supporting AI. Earnings came in above our guided range due to higher volume, favorable mix and our ongoing focus on site efficiencies. Elevated domestic China demand underscores the importance that the Chinese government and chip industry has placed on becoming self-sufficient. Chinese chip companies are rapidly investing in new semiconductor factories to advance their nation's capabilities and address export controls imposed by the U.S. and its allies. We recently celebrated the 20th anniversary of our Shanghai facility and are ideally located to support our local customers' growth plans. Based on external analysis and our customer road maps, confirmed by our internal marketing intelligence, we anticipate demand levels in the region to remain consistent or even increase slightly through the end of this year. The second reason revenue increased beyond our expectations was related to areas of deposition and etch demand in High Bandwidth Memory and advanced packaging supporting AI. Artificial intelligence models are advancing rapidly so that they can run on edge devices like PCs and smartphones, creating new and compelling capabilities in both the consumer and enterprise sectors. Additional industry investment is required to meet the forthcoming demand for advanced computing, memory and…

Thanks, Jim, and good afternoon, everyone. Thanks for joining us. In today's discussion, I'll be referring to non-GAAP numbers only. As Jim noted, in the first quarter, we saw an increase in our Products business within the China domestic market and some new demand for Products supporting AI, which we expect to stay around these levels. Our Service business also saw elevated demand from China, along with some additional business from a fab relocation. Total revenue for the first quarter came in at $477.7 million compared to $444.8 million in the prior quarter. Revenue from Products increased to $418.5 million compared to $389.7 million last quarter. Services revenue was $59.2 million compared to $55.1 million in Q4. Total gross margin for the first quarter increased to 17.9% from 16.7% last quarter. Products gross margin was 15.8% compared to 14.6% in the prior quarter, and Services was 32.3% compared to 31.7% in Q4. 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. Operating expense for the quarter was $54.5 million compared with $51.3 million in Q4. As a percentage of revenue, operating expense remained flat compared to Q4 at 11.4%. Total operating margin for the quarter increased to 6.5% compared to 5.2% in the fourth quarter. Margin from our Products division was 6% compared to 4.6% in Q4, and Services margin was 10.1% compared to 9.5% in the prior quarter. Margin improvements were largely due to higher revenue and operating efficiencies. Based on 45.1 million shares outstanding, earnings per share for the quarter were $0.27 on net income of $12.1 million compared to $0.19 on net income of $8.5 million in the prior quarter due to favorable product mix and factory utilization. Our tax rate for the quarter was 19.7% compared to 16.4% last quarter. We expect it to stay in the high teens for 2024. Turning to the balance sheet. Our cash and cash equivalents were $293 million compared to $307 million in Q4. Cash flow from operations was $9.8 million compared to $35.3 million last quarter. The change in cash flow from operations was due to year-end compensation payments and increased inventory to meet elevated demand. In early April, we amended our Term B debt facility to extend it to February 2028. Strong demand from existing and new high-quality lenders enabled us to incrementally upsize the offering by $20 million and reduce our interest rate by 0.25 point. In conjunction, we extended the maturity of our revolving credit facility to August 2027. For the second quarter, we project total revenue between $465 million and $515 million. We expect EPS in the range of $0.16 to $0.36. And with that, I'd like to turn the call over to the operator for questions.

[Operator Instructions] Your first question comes from the line of Charles from Needham.

Jim, Sheri, congrats on the solid results and very strong guidance. I think, Jim, in your prepared remarks, I got the sense that your strength in Q1 seems to be primarily due to some of the upside you see with your Chinese OEM customers, and I did notice that in your PowerPoint that the category called other OEM, meaning outside of Lam and Applied, seems to have seen the most amount of growth. But it gets a little bit hard for me to reconcile, because China revenue has been like a single-digit of percent of your total revenue. So how do I think about your actual exposure to the Chinese OEMs at this point?

Yes, Charles. Yes, you're right. The Chinese revenue is -- directly to the OEMs, is relatively small, but it's actually doubled, I think, over the last 2 or 3 quarters and then nearly doubled again. So -- and if you think about our overdrive on revenue, I mean that was about half of it. The other half was on deposition tools that are used in the AI applications.

Got it. So it sounds like the HCM or AI side, it's probably largely dominated by deposition type of tools, probably electroplating, if I have to take a guess.

That's a good guess.

So maybe another question about Service. Sheri, you mentioned about fab relocation as part of the reason for the Service revenue strength. What do you mean by that, fab relocation?

Yes. We had a customer that moved some of their parts that needed to be cleaned to a different location. And as a result, we had some additional revenue flow through the Services P&L.

Got it. That's not a China customer, no?

No. No, it is not. With every incremental dollar that we put into Service, basically, it really helps bring that margin up with the volumes flowing through there.

Got it. So maybe your two largest -- I mean, fab customers, I would guess, it's Intel and Samsung. But how are the business there trending so far? Is it still looking quite positively so far?

Yes, me again, Charles. So it's -- positive would be optimistic. It's definitely inching up. It has inched up a little bit as you saw. It's not an extremely strong recovery, but we are seeing signs of utilization starting to increase and some of the idled systems starting to be put back and getting ready for scaling up. So yes, it is getting a little bit better, but it's not extremely steep curve yet.

Congrats on the results.

Your next question comes from the line of Krish Sankar from TD Cowen.

Congrats on a strong result. A couple of questions. One is a follow-up on Charles' question. On the China revenues, you mentioned the domestic China's trend. Is that comment related to what you're seeing from China semi-cap OEMs? Or is it also tied to your U.S. semi-cap customers? Because my understanding was that you might not have the visibility with the U.S. semi-cap customers where -- who the end customer is.

Yes, you're right, Krish. We don't usually have a visibility. Or we have it, but it's in thousands of pieces on where we're shipping everything. But this is direct business from our Chinese factory directly to Chinese OEMs. We've been servicing several of these OEMs for over 15 years. We have long relationships with them. And we're pretty unique in the supply chain to have that, where we're directly supplying into the OEM in China and have been doing that for a long time. We've seen a significant -- like I mentioned earlier to Charles, we've seen that business grow from mid-single digits to double and then double again. We expect that to continue throughout the year. And as we look into what's going on with it and where it's going, we estimate about -- to anticipate your next question, Krish, we anticipate about half of it is going directly in the line and going into production, and the other half is a little bit preordered in anticipation of perhaps some more rules coming down on the trade restriction. So not all of it, we think, is being driven directly as an immediate need. But it's been a very healthy growth. And we think it's not just stockpiling. These customers are picking up new applications and are starting to grow much faster than we've seen over the last 15 years.

Got it. Got it. That's very helpful, Jim. And then like a follow-up. Obviously, one of your U.S. semi-cap OEMs, they have pretty good exposure to some of your lagging edge product nodes eventually they sell into. I'm just kind of curious, I understand China demand is very strong, which is lagging edge. But how do you see the non-China lagging edge demand?

I'm sorry, non-China what demand?

Lagging edge. Yes.

The lagging edge demand is also -- has been strong, if that's what you're asking about. But it's -- I think that strength appeared maybe a quarter or two ago, and it's starting to maybe temper a little bit, but it has been elevated.

Got it. Got it. And then the one final question. Obviously, I think you've spoken about ASML exposure in the past with EUV. My understanding is more probably for more of the high-pressure components. First, ASML are greater than 10% customer? Is it still too small for you folks?

It is not. It's mid-single digits and on its way, we believe, within a few years. But yes, it's -- and I think Charles mentioned the other. The other had ASM, ASML, KLA as well as the Chinese OEM, so that's where you see a lot of the numbers pile up.

Your next question comes from the line of Christian Schwab from Craig-Hallum Capital Group.

Congrats on the good quarter. Jim, when would you anticipate your memory customers' utilization to improve enough to show up in the cleaning business?

We're anticipating -- we've been pretty consistent about the WFE side of it, the Product side, probably not improving until 2025, and I think we are sticking with that. On the Services side, it's difficult to predict. It's definitely outside of our bottoms-up window. But you would anticipate from the past that we'd see that start to tick up in the latter half of 2024 to start to see the equipment orders coming in, in 2025.

Okay. Okay. And what is your kind of baseline thoughts of what you would anticipate WFE growth to be in 2025? And then the next question to that would be what type of growth rate would you anticipate you'd be positioned for to outgrow WFE on a go-forward basis, similar to what you did in the last sub-cycle?

Yes. I think we're -- our current view, which we're always updating, is low double digits in 2025 growth in WFE. And of course, it's always difficult to predict, and things tend to be stronger than you expect and weaker than you expect, depending on the -- where we are in the cycle. As far as outgrowing, I think it's the same formula we've been following for years that have led to our outgrowing WFE. We have a lot of, I'd say, where is a lot of the runway or the green pastures or the opportunities. The HIS acquisition has a lot of growth expected in that segment with all the fab build-outs, and their strong position there that we're making stronger from our Fluid Solutions acquisition as well. I mean we have a -- we have a great product line, but a relatively small market share versus the two industry leaders, but we've been working on getting those qualified in our main customers. Prior to our acquisition, there was a slower slog for Ham-Let, the company that we bought. So we're seeing that accelerate as well as, I think, with -- I would say we're pretty well penetrated at our largest customer, but I think -- when you look at the second, third and fourth, there's a lot of opportunity there for market share growth within those customers.

There are no further questions at this time. I would like to hand the call back to Jim Scholhamer for closing remarks.

Thank you, everyone, for joining us today, and we look forward to speaking with you again next quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.