Ultra Clean Holdings, Inc. (UCTT) Q2 2026 Earnings Call Transcript

Good afternoon, ladies and gentlemen, and welcome to the Ultra Clean Q2 2026 earnings call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Monday, August 3, 2026. I would now like to turn the conference over to Rwanda Benito of Investor Relations.

Thank you, Operator. Good afternoon, everyone, and thank you for joining us. With me today are James Zhao, CEO, Sherry Savage, CFO, and Mike Keough, CFO, beginning August 5th. James will begin with some prepared remarks about the industry and highlight some of the opportunities ahead for UCT. Sherry will follow with the financial review, and then will 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 James. James, please go ahead.

Thank you, Rondof, and good afternoon, everyone. We appreciate you joining us for our Q2-2026 earnings call. This afternoon, I will discuss industry environment and the trend shaping our customer investment, provide an update on our execution against UCT 3.0 strategy, and highlight how we are positioning UCT to deliver sustainable growth and long-term value. Following that, Sherry will provide a financial update, and then we will open up the call for questions. Throughout the second quarter, we saw increased demand across both our products and service businesses, reflecting healthy activity across all our end markets. Momentum is building as AI-driven investment reshift the semiconductor capital equipment landscape, driving increased volume and complexity in the system and components our customers require. As authentic AI becomes more mainstream, the incremental demand extends well beyond today's GPU-intensive training clusters to inference workloads utilizing higher volumes of CPU compute. For companies like UCT, the implications are particularly meaningful because every layer of semiconductor manufacturing must scale to support this next wave of infrastructure investment and AI chip demand expansion beyond GPU. volume and complexity increases customers are engaging more strategically which process partners like UCT earlier in the development cycle to help ensure manufacturing readiness and the accelerated execution as technologies advance we're confident that we will play an even more important role in our customers' long-term technology roadmaps and capacity expansion. That confidence is reinforced by the unprecedented visibility our customers are sharing with us now. They are extending their forecast and giving us longer planning horizons so we can make strategic decisions regarding capacity, supply chain readiness, engineering resources, and talent investment that support their product pipeline. As AI infrastructure scales, execution speed and innovation velocity at scale will send UCT apart from the competition. Our customers need partners that can accelerate product development, qualify new technology faster, execute flawless production ramp, and support increasingly complex global manufacturing operations. UCT is becoming more deeply embedded in their success because these are the capabilities that consistently set us apart. UCT 3.0 is transforming the way we execute being ramp ready is the foundational to our customer first mindset and long-term growth strategy it is ensuring we're prepared to support our customers whenever the whatever they need us over the past a couple of months it we have bailed out an additional 26,000 square feet of clean room space in our Malaysia facility and will be increasing our capacity within the current footprint in Singapore and the Czech Republic over the coming quarters. With those expansions we should be able to support a four billion dollar annualized revenue run rate, a 200 billion WFE by the middle of 2027. We have begun the process of evaluating future capacity requirements, strategic geographic locations, and greenfield opportunities to support the $5 billion revenue round rate of $250 billion WFE. We'll continue to align our investment with our customers' long-term demand outlook. And our NPX initiative, which integrates new product development, introduction, and transfers, reached a significant milestone recently. We have launched our first NPX Center of Excellence in Hillsborough, Oregon, designed to engage earlier and more closely with our customers. This will accelerate product qualification, improve the transition from development to high-volume manufacturing, and strengthen our position as a preferred co-annuation partner. By demonstrating our value from design to production, we're increasing our opportunities to win customers new products that support a favorable long-term margin profile. Digital transformation, the third pillar of our UCT 3.0 strategy, is enabling a more efficient, data-driven enterprise. We have begun modernizing our systems, processes, and data infrastructure, starting with the ones that best support our ramp readiness efforts. These initiatives have already improved operational visibility. accelerated decision-making, and enabled faster execution across our global operations. Combined with automation, advanced analytics, and AI-enabled capabilities, we're increasing productivity and scaling the business more efficiently as customer demand accelerates. We believe our global manufacturing footprint, engineering expertise, operational discipline, and ability to execute with speed and agility position us to capture a greater share in the years ahead. Our objective is straightforward to deepen our strategic co-innovation partnerships, outgrow the market we serve, and create sustainable long-term value for our shareholders. Before I turn to the financial review, I'd like to announce that this is going to be Sherry's last earning call as CFO of UCT. I'd like to take a moment to recognize and thank Sherry for her 17 years of dedicated service to UCT. Sherry has been a trusted leader and an exceptional steward of our business, helping guide the company through the periods of significant growth and transformation while strengthening our financial foundation. On behalf of our Board of Directors and the entire UCT family, thank you, Sherry, for your many contributions on wavering commitment to the company. We wish you all the best in your well-earned retirement. Over to you for the financial review.

Thanks, James, and good afternoon, everyone. Thanks for joining us. In today's discussion, I will be referring to non-GAAP numbers only. As James mentioned, this will be my final earnings call with UCT. It has been a privilege to be a part of UCT's growth and transformation over the past 17 years, and I want to sincerely thank our employees, customers, investors, and partners for your support. Before I begin, I'd like to welcome Mike Keough, our new Chief Financial Officer. Mike brings extensive financial, operational, and public company leadership experience, and I am confident he will be a tremendous asset to the team as they continue to advance the UCT 3.0 growth plan. For the second quarter, demand remained healthy across both products and services businesses. Those market dynamics supported another quarter of solid execution and financial performance. For the second quarter, we saw record total revenue of $644.9 million compared to $533.7 million in the prior quarter. Revenue from products was $572.7 million compared to $465.7 million last quarter. Services revenue was $72.2 million in Q2 compared to $68 million in Q1. We continue to invest in capacity to support our customers' long-term growth. We recently added 26,000 square feet of clean room space in Malaysia, with additional expansion planned in Singapore and Czech Republic soon. These investments position us to support an annualized revenue run rate of approximately $4 billion by mid-2027, while planning is underway for the next phase of capacity expansion to support $5 billion run rate over time. As production increases, we expect to benefit from improved operating leverage and corresponding margin expansion. Total gross margin for the second quarter was 16.7% compared to 16.5% last quarter. Products' gross margin was 15.1% compared to 14.6% in Q1, and services was 28.9% compared to 30% last quarter. Gross margin improved primarily due to higher volumes driving factory efficiencies. Margins continue to 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 $52.5 million compared to $51.1 million in Q1. As a percentage of revenue, operating expenses were 9.7% versus 11.4% last quarter. Total operating margin for the quarter came in at 7% compared to 5.1% last quarter. Margin from our product division was 6.5% compared to 4.2%, and services margin was 11.2% compared to 11.5% in the prior quarter. Second quarter tax rate came in at 20%, consistent with our expectations. Our mix of earnings between higher and lower tax jurisdictions can cause our rate to fluctuate throughout the year. For 2026, we expect our tax rate to stay in a low 20% range. Based on 46 million shares outstanding, earnings per share for the quarter were $0.70 on net income of $32.3 million, compared to $0.31 on net income of $14.5 million in the prior quarter. Turning to the balance sheet, cash and cash equivalents were $255.9 million compared to $323.5 million at the end of last quarter. Operating cash flow was negative $41.1 million compared to negative $33.3 million last quarter. The year-to-date cash outflow continues to reflect strategic investments in working capital, particularly inventory, to support anticipated demand and position the business for future growth. Turning to the guidance for the third quarter, we project total revenue to be between $700 and $750 million, an EPS in the range of $0.83 to $1.03. And with that, I'd like to turn the call over to the operator for questions.

Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the one on your touch-down phone. you will hear a prompt that your hand has been raised should you wish to the client from the calling process please press star followed by the two if you're using a speaker phone please lift the handset before pressing any keys one moment please for your first question your first question comes from the line of Timothy or three from UBS your line is open thanks a lot um just on the guidance, it was quite good, but it could have, it was, you know, right where I thought it would be, but it could have been even better when you consider that your biggest customer guided its

systems up, it's implying its systems are going to grow like 30% Q1Q in, you know, calendar Q3. I realize your product revenue outgrew their systems in June, so was it really just a timing thing, or did they have some inventory, or maybe you're just being, you know, maybe arguably a a little bit conservative in your guidance?

Yeah, it's a little bit both, Tim, Mr. James. I think that definitely you realize that, you know, we have a timing gap with certain customers, where we need to really, they need to integrate our subsystem into their systems, and there's a timing lag. So the revenue recognition time is different because of that. And for some other customer, they also they're a quarter and different from ours so that create a little bit of timing gap on the revenue growth but if you aggregate a two-quarter revenue growth you will see that our revenue is on par with their growth or higher thanks a lot James and then we've heard some examples so all your The customers are so full on capacity there.

I mean, they're basically booking into the back half to 27. If not, some of them, you know, out into 28, some of the spots. So is there an opportunity for them to use you as more overflow? So they come to you to maybe do some things that they had originally planned to do themselves so that maybe that can gear your, you know, revenue to the upside just, you know, given how full their internal menu capturing is.

Yeah, definitely we see that upside opportunity, especially when the customer are, to some extent, constrained by their internal capacity. You know, in this upturn, as you know, they intend to focus more on their final test and final integration capacity and overflow their subsystem capacity to partners like UCT. So, definitely, historically, we see that, you know, outgrowth opportunity when the customer gave a higher percentage of their subsystem bill to UCT.

So, it comes from the line of Charles Xi from Needham. Your line is open.

Thanks for taking my question. Congrats on the next results. And I have a question on the capacity plan. I think I heard you talk about maybe get the $4 billion run rate ready by the mid-2027, looking at a $5 billion run rate over time. But on the $4 billion, what's the current judgment on the timing? Maybe you may have to do it a little bit earlier than mid-2027, or what's the range of possibilities and what's the bias? and under $5 billion, what do you have to see to hold the trigger to really start that expansion to the $5 billion run rate?

Thank you, Charles. I think that we said we're taking the phase approach, you know, from $3 billion to $4 billion, and then from $4 billion to $5 billion, we're executed on that plan. And so, capacity ready, and that really matched the runway we see. In the first half of 2027, we all had that $4 billion run capacity, and we're going full speed on that. As you see in my slide, in our public side, make that decision pretty execution. So the timelines deal in the first half of 2028, beyond the $4 billion, and with the $5 billion in the second half of 2028.

Thanks, James. So that's pretty clear. Sherry, congrats again on the well-deserved retirement. Glad to be working with you for quite a few years. Maybe as Mike is also here, I want to get some thoughts, maybe early thoughts from Mike. how to think about margin model going forward. I know you, the team has laid out a goal of 20% growth margin, 10% operating margin at the 4 billion revenue run rate, but since the 4 billion is kind of inside right now, any thoughts on long-term, if you will, aspirational margin targets going forward, any early thoughts at the moment we I think we definitely appreciate that thank you I try to share it thank you for the nice comment I'll be answering calls on this call at this point but you'll get to talk this like later for the

incremental margins we do see them continuing to move up as we utilize more of our factories obviously we we do see us moving towards that 17% range as move through the rest of the year and hopefully moving beyond that. The 4 billion and 20% growth margin is still the goal that we are marching towards, especially during 2027. So, beyond that, we'll put out a model at some point, but that's the goals that we're still marching to with the utilization of our factories and where we're at right now.

Thank you. I appreciate it.

Comes from the line of Krish Sankar from TD Cohen. Your line is open.

Hey guys this is Eddie for Chris. A question on the customers beyond the biggest two customers. It seems that customer base has been growing year over year. Can you give us some color at what's the driver and think about it going forward and have a follow?

Yeah Chris and family as you can see that if you look at our quarter by quarter customer distribution you can see that the top two customers as presented with revenue actually reduced that from the 64 down to the high 50s so I think that that's just to show that we're diversifying our customer mix so that less volatile you know regardless of the segment move for business with our little customers and as they see we getting the momentum and more adoption in the leading-age boundary logic and just a clarification about the previous question you mentioned when you get to

full utilization your gross margins would be 20% and a full utilization would you remind us what level of revenue run rate that would be and would it be 20% because I think the September guide implies around 19% gross margin thank you yeah I mean again as we've mentioned many times it depends on multiple things whether that be mixed and revenue and rare things are shipped from jurisdiction expect etc so our goal is to be at four billion and twenty percent gross margin the question is you know obviously there's many factors that go into that so it just depends on you know where we're where we're at at that moment, but we anticipate that we will be at a run rate of $4 billion at some point during 2027.

Thank you very much.

This comes from the line of Ady Young from Oppenheimer. Your line is open.

Hi, James. Thanks for the time. One of your competitors reported some issues with component shortages in the second quarter. Just curious, did you run into any similar problems, and were there any delivery pushouts in the quarter?

Yes. So, the answer is no. I think we talked about that couple earnings ago that we really initiated the rent readiness campaign internally way ahead. So, with that, we were able to secure most of the critical components and really kind of mitigate through at this point. You know, if you look forward, the industry is implying a double-digit growth quarter by quarter, that will constantly put the pressure on the entire supply chain, and you will see excursions in WFE supply chain, and we just need to actively and proactively manage that.

And your comments around WFE, it sounds like, again, by mid-2027, you said you expect to see a $200 billion run rate WFE, and for UCT, you know, $4 billion revenue run rate. And it sounded like you also hinted that in 2028 you expect to see, you know, good growth there because you implied that you're going to add capacity beyond that, you know, $4 billion run rate, first half of 28. Just wondering what informs that outlook. Is it just firm – is it the order book, you know, the outlook? We'd love some color there.

Yeah, I think that, you know, we see a good chance for the whole industry to exceed 200 billion WFE sometime in 27, right? So I think that you see the range between 190 billion up to 220 billion. and so we just you know prepare ourselves you know and they found a boot case right is I do believe that you know sufficient safety stop additional capacity will become a competitive advantage in this kind of Thank you.

It comes from the line of Christian Schwab from Praig-Hellum. Your line is open.

Great. Thanks for taking my questions. Congratulations, Jerry, on a well-deserved retirement. It has been a pleasure working with you for many, many, many years. My only question has to do with as WAFER starts accelerate from the capacity that's put on, is it safe to assume that services will grow at the same pace as products or even potentially higher as we exit 2027?

So, I definitely see that the service will grow as we communicated before in the double But as you know that the OEMs always have their extended service, so there's a timing lag, right? So, I think that we still see the double digit growth in the 26th and 27th, but the acceleration will be after we see the ramp of the ones, the factories in U.S., the improvement of the utilization of one of our major customers in U.S., and also the kind of the leading age in factories in Korea.

That's fair. No other questions. Thank you, guys.

Great quarter. thank you there are no further questions at this time I will now turn the call over to Jane chef for closing remarks thank you operator we appreciate you join us today some of you at the call back and update you all after Q3 to mend this concludes today's conference call thank you for your participation you may now disconnect