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Ultra Clean Holdings, Inc. (NASDAQ:UCTT)

F1Q09 Earnings Call Transcript

May 04, 2009 at 5:00 pm ET

Executives

Clarence Granger - Chairman and Chief Executive Officer

Linda Clements - Vice President of Finance, Principal Financial Officer and Principal Accounting Officer

Analysts

Jay Deahna - Individual Investor, JP Morgan

Edwin Mok - Needham & Company

Timothy Summers - Wunderlich Securities, Inc.

Operator

Good afternoon ladies and gentlemen, this is the operator. Today’s conference is scheduled to begin momentarily. Until that time your lines will again be placed on mute. Thank you for your patient.

Good afternoon. My name is Ashley, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ultra Clean Technology’s first quarter financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Joining us today is Mr. Clarence Granger, Chairman and Chief Executive Officer.

I will now turn the call over to Mr. Granger. Sir, you may begin your conference.

Clarence Granger

Thank you, Ashley. Welcome to our first quarter financial results conference call. With me today is Linda Clements, our Vice President of Finance, Principal Financial Officer and Principal Accounting Officer.

Linda will begin by presenting the financial results for our first quarter and then I will follow with some remarks about the business. Linda?

Linda Clements

Thank you, Clarence. A few moments ago, we issued a press release recording the financial results for the first quarter ended April 3rd, 2009. The press release can be accessed from the Investor Relations section of Ultra Clean’s website at uct.com. In addition, we have arranged for a taped replay of this call, which may be accessed by phone. This replay will be available approximately one hour after the call’s conclusion and will be accessible for two weeks.

The dial-in access number for this replay is 800-642-1687 for domestic callers and 706-645-9291 for international dialers. The pass code is 94739714 for both domestic and international dialers. This call is also being webcast live with a web replay also available for 14 days from the Investor Relations section of our website at uct.com.

Together with our recently issued press release, this conference call enables the Company to comply with SEC regulations for fair disclosure. Therefore, investors should accept the contents of this call as the Company’s official guidance for the second quarter of fiscal 2009. Investors should note that only the CEO and Principal Financial Officer are authorized to provide Company guidance. If at any time after this call we communicate any material changes in guidance, it is our intent that such updates will be done officially via public forum, such as a press release or publicly announced conference call.

The matters that we discuss today include forward-looking statements as defined in the US Private Securities Litigation Reform Act of 1995 related to matters including our future financial performance, new product orders and shipments and industry growth.

Investors are cautioned that forward-looking statements are neither promises nor guarantees, but involve risks and uncertainties that may cause actual results to differ materially from those projected in the forward-looking statements. Some of those risks and uncertainties are detailed in our filings with the Securities and Exchange Commission, including our most recent Form 10-K filed for the year ended January 2nd, 2009. The Company disclaims any obligation to publicly update or revise any such forward-looking statements or to reflect events or circumstances that occur after this call.

Now, here are the first quarter results.

Revenue for the first quarter of 2009 was $22.4 million, down 52% from the fourth quarter revenue of $47.1 million, and a decrease of 76% compared to revenue of $92.4 million in the same period a year ago.

The decrease in revenue was due to the continued industry-wide cyclical reduction in demand affecting all semiconductor capital equipment customers. In addition, we saw a decrease in our non-semiconductor business as a result of current economic condition.

Semiconductor revenues declined $15.5 million or 57% sequentially. Non-semiconductor revenues, including sales within the medical device, flat panel display and solar industries, decreased $9 million or 46% sequentially to $11 million.

We experienced a negative gross margin for the first quarter of 12.8% down from a gross margin of approximately 1% recorded in the fourth quarter and a decrease from approximately 13% in the same period a year ago. On the $3.3 million sequential gross profit decrease, $5.4 million is related to the volume decrease, offset by approximately $2.1 million of cost savings.

We recorded a restructureD charge during the quarter related to the closure of our Tualatin, Oregon facility of approximately $146,000 net of tax or $0.01 per share. We also expensed approximately $316,000 net of tax or $0.01 per share for cost related to an acquisition transaction that was not consummated.

Operating expenses, inclusive of the restructure charge and transaction costs were $7.3 million, a decrease of approximately $600,000 from the prior quarter when excluding impairment costs recorded in the fourth quarter of 2008.

The sequential decrease reflects the cost savings from staff reductions and other cost saving activities, as well as the absence of amortization of intangibles as a result of the asset impairment recorded in the fourth quarter, offset in part by the restructure charge and transaction costs.

Net interest and other expense of $195,000 represents an increase of approximately $150,000 from the prior quarter primarily as a result of the interest income recorded in the fourth quarter on government reimbursements offsetting interest expense related to third-party debt.

Our pretax loss was $10.4 million inclusive of the restructure charges and transaction costs discussed previously. Our effective tax rate of 32% is less than the 35% previously forecasted due primarily to the effect of foreign operation.

We continue to review our corporate tax structure used to manage our business in light of current economic conditions. The first quarter net loss was $7 million. This compares to a net loss of $52.2 million in the fourth quarter of 2008 and net income of $1.9 million for the same period a year ago.

Our first quarter net loss per share was $0.33, compared to a net loss per share of $2.45 for the fourth quarter of 2008 and net income per share of $0.09 for the same period a year ago.

The first quarter 2009 net loss per share is inclusive of noncash charges of $0.03 per share related to FAS 123R during the period. As previously discussed, the 2009 net loss per share is inclusive of costs associated with an unconsummated acquisition transaction of $0.01 per share and $0.01 per share for the restructure costs associated with the closure of our Tualatin, Oregon facility.

First quarter revenue of $22.4 million and the $0.33 loss per share is within our guidance of revenue of $20 million to $28 million and loss per share between $0.25 and $0.36.

Turning to the balance sheet, during the first quarter cash increased sequentially to $29.8 million while third party debt decreased $1.2 million to $17.3 million. Taken together, cash net of third party debt increased $1.4 million during the quarter as working capital reductions more than offset the operating loss. This brings our net liquidity to its highest level since the first quarter of fiscal 2006.

Accounts receivable of $10.5 million decreased sequentially $3.3 million or 24% due to lower revenue. Day sales outstanding increased 42 days from 26 days at the end of the fourth quarter. Accounts payable of $10.7 million decreased approximately $600,000 or 5% sequentially due to reduced purchases during the quarter. Day's payable outstanding at the end of the first quarter increased to 38 days from 22 days at the end of the fourth quarter. Accounts receivable and accounts payable days outstanding returned to a more normalized level at the end of the first quarter.

Net inventory decreased $1.9 million or 5% to $37.9 million as we continued to consume inventory.

Now, Clarence will discuss our operating highlights for the first quarter and provide guidance for the second quarter of 2009. Clarence?

Clarence Granger

Thanks Linda. Semiconductor capital equipment demand continued its dramatic decline during the first quarter of 2009 with end user demand limited to next generation technology and maintenance purchases only. Our OEM customers continued their focus on reworking existing subsystem inventory whenever possible to fulfill their limited system orders.

In this very challenging market environment, our primary focus has been on maintaining a strong balance sheet while decreasing our cost structure and strengthening our customer relationships.

During the quarter, we successfully completed several balance sheet related activities. We extended the term of our revolver loan to January 2012. We added a $3 million three-year term loan to our borrowing base. We received a $6.5 million IRS tax refund and we reduced our inventory by $1.9 million.

We also achieved our revenue and EPS guidance and continued to increase our non-semiconductor revenues as a percentage of total revenues. Additionally, our new supplier agreement with FEI Company is off to an excellent start. On a negative side, our China based revenue fell as a percentage of total sales to 18.1% as a result of declines in our semiconductor, flat panel, and solar equipment demand.

Finally, during the quarter, we continue to take extensive actions to reduce our cost structure.

I will now provide further details on these activities and accomplishments. Due to the unprecedented industry decline, we continued our aggressive cost reduction measures. We decreased our active US based workforce from 556 employees at the end of Q4 to 351 employees at the end of Q1.

We took 20 shutdown days in the first quarter and have planned 15 shutdown days in the second quarter of 2009. Also beginning in Q2, we have implemented across the Board pay cuts ranging from 15% to 45%. These actions to reduce our cost structure and lower our breakeven are central to maintaining a strong cash position.

As Linda mentioned in her remarks, during the quarter, we recognized a net expense of $316,000 associated with an unconsummated acquisition transaction. As we have stated previously, we will continue to explore acquisition opportunities that meet our criteria of size, profitability, and added capabilities.

In this case, we were pursuing an acquisition that met our criteria but given the changing business environment, we would not come to mutually agreeable terms.

I will now provide an update on our three key strategic initiatives: increasing the non-GAAP delivery portion of our business, increasing revenue in our Shanghai facilities, and expanding our revenue base outside of the semiconductor capital equipment industry.

The non-gas panel portion of our revenue continued to increase to 71% of total revenue in Q1. This was primarily the result of major declines we have experienced in the semiconductor and flat panel portions of our business.

Our China based revenue decreased to 18.1% of total revenue in Q1 down from 26% of revenue in Q4. Again, this was the result of greater declines in the semiconductor solar and flat panel portions of our revenue which are primarily manufactured in our Shanghai facilities.

At the same time, we continued to make progress on expanding beyond the semiconductor equipment industry. While our revenue declined in all sectors during Q1, non-semiconductor revenues increased on a percentage basis to 47.5% of total revenue up from 42% of total revenue in Q4.

Finally, at the end of January, we announced our Global Supplier Agreement with FEI Company. Under the terms of this agreement, Ultra Clean is providing hosted manufacturing services to FEI in their Hillsboro, Oregon facility.

FEI is a leader in the nanotechnology imaging industry. The transfer of currently identified product line to UCT is proceeding on schedule. During March, we made our first delivery to FEI and during Q2, we project FEI will be approximately a 10% revenue customer to UCT.

For 2009, we expect revenues from our agreement with FEI to range between $10 million and $15 million. With future upside potential, as FEI grows its revenue and expands its outsourcing opportunities.

Next, I would like to provide our guidance for Q2.

During Q2, we project the stabilizing of industry wide demand. Revenue for the second quarter is expected to range between $20 million and $26 million, and net loss per share is projected to range between $0.16 and $0.27.

To recap the first quarter activity, UCT achieved its revenue and earnings per share guidance in another very challenging quarter for the industry. We have strengthened our balance sheet, increasing our cash and decreasing our net debt.

We also extended the term of our revolver loan to January 2012 and added a $3 million term loan for our available borrowing base. We took necessary cost control measures, including headcount reductions, mandatory time off, and the initiation of across the Board pay cuts.

Finally, we announced and started a major new partnership agreement with FEI Company. So, industry demand is very weak, our pipeline of new products remained strong.

In closing, we are very pleased with our financial stability and we remain very optimistic about our market position and our flexible business model.

With that, operator, we would now like to open the call for questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Jay Deahna - Individual Investor.

Jay Deahna - Individual Investor, JP Morgan

I am going to ask a few questions then I will go back in the queue. The first one is on your Q2 revenue guidance; you got a little of down, a little of up there just wondering which end looks more real as you see it today. I presume the down is just being conservative, but within that, how has the outlook for Q2 revenue evolved over the past two or three months?

Clarence Granger

I guess what I would say first of all you said how has it improved over a change over the last two or three months, I would say the biggest change that occurred in the last two or three weeks and directionally we have seen it upward significantly in the last two or three weeks. We had actually anticipated that Q2 revenue would be lower than Q1 revenue a couple of months ago, and we anticipated that Q2 would probably be our lowest revenue quarter. It no longer looks that way. Now, it looks Q1 was probably our lowest revenue quarter.

Jay Deahna - Individual Investor, JP Morgan

I see. And is the revision up coming from one or a combination of your served end markets?

Clarence Granger

I guess what I would say is with regard to our overall served end markets. We are starting to see a significant upturn in semiconductor. The solar and flat panels are still very slow, and recently medical has slowed also, but that has been offset by the increase that we are experiencing with FEI.

Jay Deahna - Individual Investor, JP Morgan

I see. And, at this point, in the ball game, have your semiconductor customers sort of explained to you why they are revising their forecasts up to you and do you have an initial outlook on what Q3 might look like versus Q2 directionally?

Clarence Granger

Jay, this is just Q2. We are not going to give guidance on Q3. It is really too early to say on that. Basically, our customers are starting to get some new orders. So for a long time, if they were getting only technology build and refurbishment activity, they have started to get some new orders from some of their end customers.

Operator

Your next question comes from the line of Edwin Mok - Needham & Company.

Edwin Mok - Needham & Company

I have two questions. So, can I ask you a few questions on your guidance? If I look at the midpoint of your revenue guidance, around flattish but earning seems to be improved quite a bit, are you getting more leveraged on your manufacturing or are you seeing more offering saving? Can you help me with that?

Clarence Granger

Sure Edwin. So, what has really happened is in Q1 was when we to add this huge headcount reductions and many of the other actions that we are starting to implement. We actually went from Q4, we had 556 employees and by the end of Q1, we were down at 351. So, that occurred throughout the quarter. Obviously, there are all sorts of costs and expenses associated with that. It was a very painful quarter, but as a result, we are coming out with the much lower cost on the other end.

We have also implemented across the board pay cuts starting in Q2 which will further reduce our expenses in Q2. So, we are pretty confident of those earnings EPS projections in Q2 will be based on those projected revenue level.

Edwin Mok - Needham & Company

Great and then on FEI, it sounds like you are quite optimistic or quite confident that they are at that business realm. I was wondering, did you recognize any revenue in the first quarter and it looks like it is very backend loaded, any risk there that the customers have to dial back their expectation there a little bit?

Clarence Granger

Sure. Linda, do you remember how much revenue we recognized in Q1?

Linda Clements

About $200,000.

Clarence Granger

So, it was very small Edwin. I do not if you heard it but about $200,000 but we did make initial shipments and we are tracking on schedule. As I mentioned, we anticipate that they will be about a 10% customer in Q2. So, we are talking say $23 million at the midpoint. We are talking about them doing more than $2 million in revenue, up from $200,000 and we are very comfortable with that number. So that is a big step function for us and we expect to see a continued pretty good growth ramp there targeting again for all of 2009 with UCT between $10 million and $15 million in revenue.

So, yes it is still a little back-end loaded as we start to ramp but we are starting to see pretty good numbers in Q2. Our ASPs with them are extremely high. They are close to $1 million.

Edwin Mok - Needham & Company

That was helpful. First question regarding flat panel display and then solar sector you mentioned during your comment or during your answer to Jay's question that those markets remain quite slow for you. I am curious just if you look at just year to year point of view for 2009, do you expect any improvement in those end markets going through the rest of this year, for example, last year you guys had ramped Photon Dynamics so I imagined you are probably at the high revenue base so I was just curious year to year, any chance of improvement there?

Clarence Granger

Yes, I guess I would say of the two, we see more life in the flat panel at the moment. Solar seems extremely slow. Now, on the solar side, we primarily have one customer and things have been very slow on that side and we have not seen any measurable recovery at this point in time. On the flat panel side, applied and Photon Dynamics, there are two major customers and we are starting to see a little bit of life in that side of the business with both of those. We have been very successful with Photon Dynamics. They are very pleased with us and they have been looking to award us new business opportunities. Of course, Photon is now owned by Orbotech so they are really our customer now.

Edwin Mok - Needham & Company

Okay, good. I will just ask one more question. So, your inventory level has come down but relative to your current revenue basis, it looks still higher than your historical level in terms of inventory base. I was just curious, any risk that you might write down any inventory going forward?

Clarence Granger

Well, we always have some levels of inventory write downs. We think we protected ourselves pretty well. We do not think there will be any huge inventory write downs. We do expect to continue declines in our inventory. If you look over the last year, we brought our inventory down by about $11 million. I would expect over the next year, we could probably bring it down by another $10 million so that is one of our key sources of cash over the next year but I do not think there is, I think we are pretty comfortable with the way we are accounting for inventory. Linda, would you like to add anything?

Linda Clements

Yes, so we provide allowance for obsolescence within our inventory and really scrub that pretty well at least quarterly. We also have some protection in our customer contracts to certain inventories. So, we do believe we do not have that we have kind of managed their exposure there.

Clarence Granger

That net inventory includes about 12% reserve, is that it?

Linda Clements

Yes.

Clarence Granger

Then flow, so we have already factored in 12% of the inventories being obsolete.

Edwin Mok - Needham & Company

Great, sorry I have to squeeze one in. Just on gross margin, you guys have negative gross margin last quarter because of fixed cost itself and then you guide in for revenue around flattish relative in this point. Do you still visualize negative gross margin in the coming quarter or will the restructuring help flow with that, help reduce the fixed cost assumption there?

Linda Clements

This is Linda. We still expect to have a negative gross margin in Q2 while overall, we are reducing our cost. We kind of reduce across the board so we still will experience a negative gross margin in Q2 or at least that is our forecast.

Operator

(Operator's instruction) Your next question comes from the line of Timothy Summers - Wunderlich Securities, Inc.

Timothy Summers - Wunderlich Securities, Inc.

So Clarence, on the guidance, let me just run through the math I have got here. You are saying your business has stabilized and you did basically $22.5 million in the quarter. If we add 10% unto that for FEI in 2Q, kind of revenue run rate of $25 million in 2Q. I know you have already given guidance but is the way I am looking at that reasonably correct?

Clarence Granger

Yes, it is reasonably correct. I guess the only thing I would say on the downside is we had not seen much decline in our medical equipment customer, intuitive surgical and lately, they are seeing some declines. Essentially, it is an issue with funds that hospitals have to invest in new equipments so I would say they are down about 10% to 15%.

Timothy Summers - Wunderlich Securities, Inc.

Is that 10% to 15% quarter over quarter?

Clarence Granger

Yes.

Timothy Summers - Wunderlich Securities, Inc.

And secondly, on the last, on the fourth quarter earnings call, you guys highlighted several times that the OEMs were reworking their inventory and I know they were doing that in the first couple of months this quarter. Have you seen that abate somewhat and do you anticipate that to be an issue into 2Q?

Clarence Granger

Sure, Tim. It is Clarence again. It will still be an issue in Q2. There are some areas that we are still seeing that our customers have some inventory, however, it is definitely coming down so I would expect the rest of that to be consumed during Q2 and by Q3, I would expect that to be abating significantly.

Timothy Summers - Wunderlich Securities, Inc.

Okay and is there any way you can quantify how much that impacts your revenue line on a quarterly basis?

Clarence Granger

Tim, I will have to go back and do an analysis. We really do not have anything that we have done on that right now. I will try and give you at our next earnings call. I will try and give you some feedback on that.

Operator

(Operator's instruction) Your next question comes from the line of Jay Deahna - Individual Investor.

Jay Deahna - Individual Investor, JP Morgan

Couple more questions. First of all, Varian, I believe you guys are getting deeper there. I am just wondering how that is progressing and when we can see that potentially be a broader customer for you.

Clarence Granger

Yes, we are very comfortable with Varian. We continue to expand our market opportunity there. Unfortunately as I am sure you are aware, they are not shipping very many systems at all and unfortunately, the ones that they are shipping, they do have existing inventory that they are utilizing. So, we are very comfortable. It is hard for me to quantify it at this point in time but they are very interested in expanding their relationship with us and they are interested in not extending their internal manufacturing capabilities as they recover from this down turn and so we have been, we would like to believe that we will have significant opportunities moving forward.

Jay Deahna - Individual Investor, JP Morgan

Okay, in terms of your pipeline of new business opportunities, obviously FEI was a big deal for you in the first quarter. We did not hear about any new design wins at the rest of your customer base such as Applied. Is your pipeline of new design activity that could turn into new mandates, how does that compare to where you have seen at the past?

Clarence Granger

Well, first of all, it is very full. It is also very similar to what has been in the past so we have not seen any decline in our new business opportunities actually if anything is going up. One of our big opportunities relates to, at the transition of Applied Materials to a larger presence in Southeast Asia. They have been a little bit slowed down on that so that has maybe slowed things down a little bit in terms of an actual transition but we are very confident that we are very well positioned to benefit from that as they start to move ahead.

Jay Deahna - Individual Investor, JP Morgan

I presume you are talking about down shifting their final assembly for a certain products anyway to the back half of this year from Austin to Singapore.

Clarence Granger

Yes, we are talking about their future Singapore facilities, yes that is correct.

Jay Deahna - Individual Investor, JP Morgan

Okay. So, if you look at Applied shifting a lot of their final assembly to Asia from Texas, the general desire of companies like Varian not to ramp up their internal manufacturing as they come back up into the next cycle and the increasing Asia centric nature of equipment demand, do you think that as we roll through the next couple of years into the next cycle that your business out of your China facility will be a larger percentage to your sales versus the last cycle and if so, what kind of impact can that have on your operating margins versus last cycle?

Clarence Granger

Sure. Well, first of all with regard to our long term expectation in China, as you know, we set up our first manufacturing location in China in March of 2005 and so that has, we think we have done an excellent job in preparing ourselves for future transitions to Asia. So, we opened our first facility in Shanghai in March of 2005. We opened our second facility in Shanghai fairly close to the first one in November of 2007. I would anticipate when the industry started to recover and within the next few years, the majority of our manufacturing greater than 50% of our manufacturing will come out of Asia. Currently as I mentioned in the script, 18% is coming out of Asia. When we do transition to Asia, we do capture higher margins due to some of the lower cost that we experienced in Asia.

So, we would expect our operating margins and our gross margins to increase as we transition to Asia. Our model is a gross margin of 18%, operating margin of 11%. We still believe that is very achievable when we return to higher levels of revenue and transition more to Asia. So, that is still our long term target, Jay, is to achieve 18% gross margin, 11% operating margin with a higher percentage of revenue in China as we start to come out of this next downturn.

Jay Deahna - Individual Investor, JP Morgan

Okay and two more quick ones for now, first of all for Linda, when you said you are expecting a negative gross margin in 2Q, is that at the entire range of revenue guidance for the quarter? In other words, if you hit the higher end of the revenue guidance, you still expect the negative gross margin?

Linda Clements

No, Jay. The negative gross margin is up to midpoint. So, we would expect to have a small negative gross margin at the midpoint but at the higher end of the range, we expect positive gross margin.

Jay Deahna - Individual Investor, JP Morgan

Okay and then Clarence, let us say, I believe if I recall from the last call you guys are targeting cash breakeven around $35 million. Is that still the case? And once you cross over that and go cash flow positive, what are the priorities between I guess paying down a line of credit, buying back stock or making acquisitions?

Clarence Granger

I will let Linda address the cash flow breakeven.

Linda Clements

So, Jay right now, our cash breakeven looks like it is about $38 million at our current level.

Clarence Granger

So our target is still to get down to 35 and we are very confident that we can do that. Obviously, we have got some other actions in place to do that. But going back here, the correct question, what are we going to do with the money when we start getting back to cash flow positive? I think there are several ways we could spend the money. We could pay back our debt. We could buyback more stock or we could look at other acquisitions or we could just sit on the money.

We are paying the revolver down according to our terms. We are very comfortable with our current payment schedules. So, I have no additional desire to accelerate any loan repayment and we would not anticipate doing that. In terms of buying back our own stock, we have done that in the past. At that time, we thought there were no other better alternatives than buying back our stock. Right now I think there are probably better alternatives or better opportunities out there in terms of potential acquisitions.

We think in a downturn like this, there are likely to be potential acquisition opportunities that are going to make sense from a long term strategic standpoint. We are not acquisition crazy. We have only done one in the last three years of a company called Sieger but it has worked out very well for us. So, I would say the most likely scenario if the right opportunity came along would be to consider an acquisition.

Jay Deahna - Individual Investor, JP Morgan

Okay, I got two more but I will step out of the line right now after I congratulate Edwin on his baby.

Operator

You have a follow up question from the line of Edwin Mok - Needham & Company.

Edwin Mok - Needham & Company

Two housekeeping questions; one is, what was the depreciation in our cash flow for the past quarter?

Linda Clements

Depreciation was, it was down about $500,000 from Q1 so that was seated about, actually I do not have that number right in front of me and I apologize for that. Can we get back to you on that one?

Edwin Mok - Needham & Company

Yes, no problem at all. And then, just quick question on tax, so tax rate you guys have recorded 32% last quarter. How should we model that going forward?

Linda Clements

Well, we believe that 32% is appropriate rate for this year. We use an effective tax rate for the year and so that is what it looks like this year should end up at.

Operator

You have a follow up question from the line of Jay Deahna - Individual Investor.

Jay Deahna - Individual Investor, JP Morgan

First of all, Clarence, it started last cycle Ultra Clean was a gas delivery subsystem supplier almost exclusively focused on some equipment and by the end of the last cycle, you are serving foreign markets, building many different types of subsystems and full systems. So, what I am wondering is in the last revenue peak, Ultra Clean annualize was about $440 million based on taking your peak quarter among divided by four. Now, that happened in tandem with a $60ish billion global semi CapEx figure that was calendar 2007. Just wondering, do you have any idea if what level of global semi CapEx roughly Ultra Clean could kind of get back to that $400 million to $450 million revenue level? I mean, obviously it depends what other markets are doing and there are some moving parts there but I am just wondering, do you think you can do that on $30 billion or $40 billion in global CapEx? I am just trying to gage it.

Clarence Granger

Sure and again, we are just taking rough estimates here but if you look at that time that you are talking about, roughly 70% to 80% of our overall revenue came from gas delivery systems. We are down to roughly half that right now. So, my expectation would be that we could probably those same revenue levels and same margin levels at about half the semiconductor equipment demand. So, it is somewhere in the $30 billion to $40 billion range.

Jay Deahna - Individual Investor, JP Morgan

And then lastly, obviously we are all worried about the general economic trends and the general semiconductor cycle trends and what not but if you just kind of push that aside for a moment and focus on what you are trying to do tactically and strategically with Ultra Clean Holdings, what are the primary companies specific execution risks that keep you up at night?

Clarence Granger

Everything keeps me up at night, Jay. First of all, the macro still is kind of the overwhelming thing once we come out with recession or whatever it is, once we come out of that, I know we will do well but in terms of company specific, the biggest one right now for me is employee related so we have forced everybody to take pay cut time off. Some people that are on very low, the morale is pretty low. I am very concerned about what do we need to do make sure that our team is sufficiently motivated and wants to stay committed to UCT. So, part of that is related to what can I give back to them and the way stock options and other things to keep our key employees motivated and make sure that they do not want to look at ways to jump shift. So, that is primarily what we are focused on right now from a UCT specific standpoint is, how do I make sure we cut cost but keep the core team intact?

Operator

(Operator's instruction) And I am showing that there are no further questions at this time.

Clarence Granger

Okay, well at this point, I would like to thank everyone for participating in our Q1 conference call. We look forward to seeing you at the investor conferences or again in our Q2 conference call. Thank you everyone.

Operator

This concludes today's Ultra Clean Technology first quarter financial results conference call. You may now disconnect.

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