Good day, and welcome to the Ultra Clean third quarter 2022 conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Ms. Rhonda Bennetto, Investor Relations. Please go ahead, ma'am.
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. With that, I'd like to turn the call over to Jim. Jim?
Thanks, Rhonda, and thank you all for joining us today. I'm going to start with a brief review of our third quarter results and provide some insight into how we feel the rest of the year will play out. I'll also share our thoughts regarding 2023 and beyond and provide some additional commentary on our capital allocation strategy. After that, I'll turn the call over to Sheri for a financial review, and we will open up the call for questions Solid operational execution and modest supply chain improvements contributed to a strong third quarter. Although the supply chain continues to present challenges, enhanced collaboration amongst our global teams, our suppliers, and our customers has alleviated most constraints, and we expect to see incremental improvements in the coming quarters.
While some customers continue to prioritize and reconfigure their delivery schedules, we have seen only limited cancellations relating to the new export regulation for US semiconductor technology sold in China. If we use the midpoint of our fourth quarter guidance, we expect full-year revenue to be up roughly 16% over 2021. After several years of unprecedented growth, we are anticipating a decrease in demand fundamentals and believe there will be a pullback as chip makers and their customers draw down inventory and realign their investment plans. UCT is much larger and more diversified now than ever before, and our operating model enables us to quickly flex and buffer the effects of a broader industry pullback. With 30+ years experience adjusting to these ups and downs, we are confident in our ability to perform well in a broad range of market scenarios.
Long-term, we remain very bullish on the industry as a whole. Demand for products powered by semiconductors is accelerating, driven by multiple end applications from smart electric cars and mobile devices to communication infrastructure, AI, and IoT devices. UCT has taken deliberate, strategic steps to ensure that we are well-positioned to outperform as these new applications shift to volume manufacturing. The expansion of our capabilities with resources strategically close to our customers has deepened our collaboration and will enable us to accelerate production with greater operational efficiency. Our new Malaysia facility is a great example of how we have become more globally diverse, taking our operations to a whole new level in terms of scale, efficiency, supply chain infrastructure, and automation. Our Malaysia site is ramping to schedule, and we are seeing strong engagement as customers look to secure a long-term outsource manufacturing partner.
This site has become another key driver to our share gains, and as geopolitical events unfold, it will become even more important as we continue to outgrow the industry. The extended outlook for semiconductors remains robust, and UCT is ideally positioned to capitalize on future opportunities. In addition to prioritizing investments supporting our growth strategy, we also recognize our commitment to deploy capital that drives the greatest return for our shareholders. Given our strong cash flow, we believe now is the time to initiate a share repurchase program. This new program will enable us to act opportunistically when conditions are right while maintaining a disciplined approach to capital allocation, including debt repayment, while maintaining our healthy balance sheet. Our conviction in our growth strategy and business model has never been stronger, and this program provides another avenue to return meaningful value to our investors.
In summary, we see sustainable strength in our markets as large, powerful trends drive a fundamental expansion in the demand for semiconductors. In the short term, we will focus on implementing operational efficiencies and optimizing our global footprint. Longer term, we expect to capture an even larger share of our addressable market. With that, I'll turn the call over to Sheri for a review of our financial results. Sheri?
Thanks, Jim, and good afternoon, everyone. Thanks for joining us. In today's discussion, I will be referring to non-GAAP numbers only.
Solid execution supported by ongoing demand for our products and services resulted in total revenue for the third quarter of $635 million compared to $608.7 million in the prior quarter. Products division revenue was $556.3 million compared to $532 million last quarter, and revenue from our services division was $78.7 million compared to $76.7 million in Q2. Total gross margin for the third quarter was 20.6% compared to 20.3% last quarter. Products gross margin was 18.3% compared to 17.8% in the prior quarter, and services was 36.9% compared to 37.2% in Q2.
Margins can be influenced by fluctuations in volume and mix, materials and transportation costs, and manufacturing regions, so there will be variances quarter to quarter. Operating expense for the quarter was $56.5 million compared with $55.9 million in Q2. As a percentage of revenue, operating expense was 8.9% compared to 9.2% in the prior quarter. Total operating margin for the quarter was 11.7% compared to 11.1% in the second quarter. Margin from our products division was 10.8% compared to 10.2% in the prior quarter, and services margin was 18.2% compared to 16.9% in the prior quarter due to reduced spending.
Based on 45.6 million shares outstanding, earnings per share for the quarter was $1.06 on net income of $48.6 million, compared to $1.04 on net income of $47.4 million in the prior quarter. Our tax rate for the quarter was 17.9% compared to 15.2% last quarter. We expect our tax rate for 2022 to stay in the mid to high teens. Turning to the balance sheet, our cash and cash equivalents were $453.5 million at the end of the third quarter, compared with $421.4 million last quarter.
Cash from operations was $71.7 million compared with $81.8 million in the prior quarter due to timing of cash collections and payments. We made an additional debt payment of $11 million in the quarter. During the third quarter, we finalized the divestment of our third non-core, non-semi subsidiary that came with the Ham-Let acquisition, resulting in a $20.8 million pre-tax loss. The impact of this divestiture is reflected in our third quarter GAAP financial results. Given the current global macroeconomic and geopolitical uncertainty, including the effects of the new export regulations for US semiconductor technology sold to China, we are keeping our guidance range wide. We project total revenue for the fourth quarter of 2022 between $600 million and $650 million.
We expect EPS in the range of $0.94-$1.14. As we announced today, the board has recently approved a stock buyback program up to $150 million over a three-year period. We intend to be opportunistic with our purchases. However, we have not factored this into our fourth quarter guidance. With that, I'd like to turn the call over to the operator for questions.
Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then one on your touch tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. The first question will come from Quinn Bolton with Needham & Company. Please go ahead.
Hey, guys. Congratulations on the strong near-term results. Obviously, it's a pretty, you know, quickly changing demand environment, especially 2023. One of your large customers last week predicted WFE could be down, you know, north of 20% year-on-year to the low $70 billion range. I guess I'm just wondering, you know, to the extent that WFE falls in that range, how are you looking at 2023? Do you think your revenue would be down, at least on the product side, in line with WFE? Do you think you could outperform absent acquisitions? You know, any guidelines you could give us as you're thinking about 2023?
Yeah. Hi, Quinn. Thanks. We don't see it down more than 20% at this point. To your question about outperforming, typically over the last five years or so, we've outperformed in an organic way, outside of M&A, on an average of five points above WFE. We see that we continue to have good momentum in that space on winning share incrementally, and we see that should continue.
Jim, if I'm just thinking about the product side of the business, if WFE is, say, down 20%, you guys outperformed by 5%, thinking about your products business down in the range of 15% makes-
Yeah.
Does that make sense sort of as an initial sort of view to next year?
Yes. That's right, Quinn. That's our view.
Got it. If that's the top line framework, Jim, how do you think about managing OpEx? I mean, you've got a lot of skilled labor that you may not wanna let go if you think it's a you know, relatively short duration downturn, but obviously, if you don't cut OpEx, you know, you could see a bigger swing on earnings. How are you thinking about managing OpEx through a potential downturn in 2023?
Yeah. Maybe I'll address the like all spending. A huge part of our cost structure is materials and direct labor, and those we can flex. It sometimes takes about a quarter to flush through, but we can flex those pretty quickly along with revenue. We've done this before. After 30 years, we've been through many of these. On the OpEx side, you're exactly right. It's always a balancing act like we did in 2019 to keep the infrastructure in place and the continuous improvement in place through a downturn, which you know we don't see any reason why it would be extended outside of any large macro events. We make that balance. We did that in 2019 and we came out even stronger.
We take that time to really also clean up after a pretty crazy few years. We do things like consolidate sites and put in things that make us stronger and more nimble and leaner as we go forward. On the OpEx side, obviously, we will be adjusting, you know, the spending there. There's some critical programs that we will obviously keep in place for the longer term.
The last one, it sounds like from that comment about perhaps optimizing, you know, where you're manufacturing, it sounds like this, you know, a downturn might be an opportunity for you to bring even more to Malaysia to continue to ramp that facility as it's lower cost than some of the other global facilities in your footprint.
Yeah, that's exactly right. Malaysia is ramping up pretty much on schedule. It is our lowest cost site as well as some of the, you know, local geopolitical events. I think they're gonna help. You know, the entire industry will be looking, you know, towards Southeast Asia specifically. We're really well set up there.
Excellent. Thank you, Jim.
Thank you, Quinn.
The next question will come from Krish Sankar with Cowen and Company. Please go ahead.
Hi. Thanks for taking my questions. This is Steven calling on behalf of Krish. I guess, Jim, my first one, for you, just in terms of the near-term guidance. Just given some of the comments about improvements in the supply chain, I would imagine that product cycle times are also improving. As a result of that, is it safe to assume that your customers might also be reducing their inventory levels that they have at their end? Or do you see any indications from your customers that they're still running strong and want to maintain some level of buffer inventory that they've been maintaining in the recent quarters?
Yeah. Probably a question better suited for them, but I think everyone in the industry is going to be reducing their inventory levels to some extent. The supply chain crisis is nearly abated, not only for us, but for everyone. I think obviously everybody's flushing through their backlog, you know, in this last quarter. I'm sure there'll be inventory adjustments, you know, due to some short-term softening in the industry. The magnitude of that, we haven't seen that yet in the fourth quarter.
Got it. Okay. That's helpful. I guess my follow-up is on your services business. So just kind of tying it into the earlier questions about calendar 2023, WFE coming down, you know, based on market expectations of 20%. If WFE does come down that much, what are the implications to your services business, especially since that's more tied to wafer starts and capacity realization rates? What have you seen there so far? You know, if the industry is down, you know, 15%-20%, can your services business still grow potentially?
Growth will be a challenge. I think we will see some wafer starts off. A lot of it, what's happened in the wafer starts has been in the memory space that's already happening today. With the memory, fabs do not use much in the way of high tech cleaning and coating and analytics. That has been a very minor effect for us. Obviously, there have been some logic and foundry slowdowns as well in one or two of the customers. I think we would tend to grow or tend to fall in line along with wafer starts. I do expect wafer starts will fall a bit.
The swing in revenue is, as you've seen in the past, pretty dampened compared to WFE.
Appreciate it. Thanks so much for the color.
Thanks, Steven.
The next question will come from Hans Chung with D.A. Davidson. Please go ahead.
Thank you. This is Linda on behalf of Hans Chung. Thank you for letting us ask questions. First of all, congratulations on the quarter. I guess my first question, in terms of the China export restrictions, I wanted to ask, obviously, the entire industry is dealing with the impact, but I was wondering if you might be able to quantify for us how much revenue might have been affected, both in the third quarter as well as any potential impact in the fourth quarter guidance, from the regulations.
Yes. Hi, Linda. This is Sheri. Nothing has affected us in the third quarter, but we anticipate around a $15 million impact in the fourth quarter for the new export legislation.
Oh, great. Thank you for the color. Maybe my follow-up question, again for Sheri. On the gross margin puts and takes, I was wondering from your perspective, with, I think you mentioned, supply chain issues easing and maybe some inflationary pressures and volume issues. Can you give us a little bit more color on the plans there and how we should think about, maybe impact in Q4 and, overall calendar 2023?
Yeah. We're evaluating that right now. I mean, we're evaluating that right now. Obviously, this, some of it will depend upon where the revenue is for calendar 2023. You know, as things go down, we do see gross margin going down because you can't completely eliminate all factors. As Jim mentioned, we will be looking at our footprint and other costs associated with our revenue. Materials and direct labor make up about 55%-70% of the P&L. That's something that you know is taken into account right away when revenue comes down. We'll be looking at that as we go across the year. We're not really giving guidance at this point for the full-year, but that's something that we're heavily looking at at this point.
That's fair. Lastly, regarding the Malaysia facility, if I remember correctly, in the past, you have said that the first phase of the facility could do about $200 million a year and above $50 million a quarter. Am I getting the numbers correctly? With that, what was the revenue run rate in Q3? If you may, what do you expect in Q4 and potentially 2023?
Yeah, that's right. Phase one, we mentioned around $200 million run rate for Malaysia, and we're pretty close to that run rate. A little bit shy, but pretty much on schedule. The total capacity of that fab, that our factory when it's up and running, will be $600 million-$800 million. Probably won't need all of that next year, but it's been ramping pretty well.
Yeah, Q3 was about $24 million. We see that continuing to go up in Q4.
Great. Thank you.
Thank you.
Thank you, Linda.
The next question will come from Christian Schwab with Craig-Hallum. Please go ahead.
Hey. Hey, guys, this is Tyler on behalf of Christian. Thanks for letting us ask a couple of questions too. Going back to the services side of your business, Jim, you know, the Ham-Let acquisition, you guys have talked in the past about some share gain opportunities and some potentially pretty significant ones. You know, I just wanted an update on those thoughts, you know, as the environment here softens, does that change your outlook there? Does it maybe even improve your opportunity to pick up some share gains to offset some of the softness? Any thoughts on that would be appreciated.
Yeah, definitely market share and the former Ham-Let, we call it Fluid Solutions, continued market share improvements are part of that, you know, 5 points of outgrowing the market. You know, we're coming from a very small market share, so we've made great strides this year, even before a lot of the capital equipment that we've ordered for that business has come in. We've increased the capacity and the output and the revenue from that acquisition pretty substantially, I think over 30, around 30% year-over-year. Absolutely, going into next year, even with the WFE falling, we see a lot of opportunity there.
We've been in the situation where if we could make it, we could sell it, and that's where the largest part of our backlog in our business still resides. I think you mentioned service. I'm not sure what the question is beyond what I've already answered. I think unless you're talking about service with Fluid Solutions. But Fluid Solutions is primarily the majority of the sales are into the products or the equipment side, and there is a little bit in the directly to the fabs, and we're of course looking to expand that, but that's a multi-year program.
That's great. That's exactly what I was talking about, the Ham-Let, the Fluid Solutions, so thank you.
Okay.
A lot of the questions otherwise have been answered, so I thought maybe just, you know, big picture, you know, fundamentally during a downswing like this, Jim, I know in the past couple of years, you know, when things have been, you know, pretty robust, you've talked about opportunities to gain share, to gain new modules, new nodes with, you know, some of your leading customers. So fundamentally, you know, those customers during a downturn, you know, what does that look like as opportunity for you to, you know, better inject yourself with them? Any thought there?
Yeah. I mean, we've been doing a great job of that through the year. It's actually maybe what you're alluding to. It's been harder with supply chain somewhat seized up throughout the year for those programs to go forward. Certainly in the next year, you know, there'll be a lot more focus on that. I think our customers are going to see, you know, and they're expecting in the longer run, 2024 and 2025, that, you know, we've got another big hill to climb in WFE. Yeah, 2023 will be the time to make sure that, you know, for us and for our customers to get set up for, you know, the rebound side after 2023.
That's great. All right. That's all for us. Thanks, Jim.
All right. Thank you, Tyler.
This concludes our question and answer session. I would now like to turn the conference back over to Mr. Scholhamer for any closing remarks. Please go ahead.
Thank you, everyone, for joining us today, and we look forward to speaking with you again in the new year.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.