Ultra Clean Carving A Niche

June quarter top and bottomline results for Ultra Clean Holdings, Inc. (UCTT) slightly missed consensus estimates. The company is expanding its product line to include frame assemblies, top plate assemblies and process modules.

The Seiger acquisition is progressing seamlessly and the company is transitioning several product lines to Shanghai. This has the effect of diversifying the revenue base as well as growing margins. Despite the progress, semiconductor weakness will provide a headwind for any non-semi gains. Consequently, we would recommend investing in shares of UCTT and are reiterating our Buy rating.

Ultra Clean has benefited from several trends in the market. Cost-cutting initiatives of original equipment manufacturers led them to increasingly outsource their gas panel requirements to companies such as UCTT. This is part of the disaggregation model in which it is economically advantageous to outsource complex sub-function components to specialist firms. The company carved a niche out in this market, although it is characterized by slow growth and lower margins.

The low growth profile of the gas panel business prompted management to seek other growth avenues to supplement its core business. In keeping with this strategic decision, UCTT started supplying subassemblies, which currently generate around 16% of quarterly revenue. With the first chemical delivery and process module shipments underway, the management expects this product line to be the primary growth driver for the company.

The ASP of the new process module is 4-5x the ASP of a typical gas panel supplied by the company. In the past year, Ultra Clean announced two new wins with existing large OEM companies outside the gas panel market. This doubles UCTT’s non-gas business projects from two to four. These four projects should combine for $40-$50 million once fully ramped up.

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