Ultra Clean Holdings, Inc. (UCTT) Q3 2026 Earnings Call Transcript

Good afternoon, ladies and gentlemen, and welcome to Ultra Clean Technology third quarter 2026 earnings call and webcast. 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 the star zero for the operator. This call is being recorded on Tuesday, October 27, 2026. I would now like to turn the conference over to Rwanda Benetto, Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, everyone, and thank you for joining us. With me today are James Zhao, CEO, and Mike Keogh, CFO. James will give us some prepared remarks about the industry and highlight some of the opportunities ahead for UCT. Mike will follow with a 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. And with that, I'd like to turn the call over to James. James, please go ahead.

Thank you, Rhonda, and good afternoon, everyone.

We appreciate you joining us for our third quarter 2026 earnings call. With me today is Mike Keel, who came on board as UCT's Chief Financial Officer in August. This is Mike's first earnings call with us, and I will share a few more words about him shortly. This afternoon, I will briefly highlight our third quarter result, share our view of the industry, and update you on our UCT 3.0 strategy. Mike will then review our financials, and we'll open the call for questions.

I'm very pleased to report that UCT delivered another strong quarter.

Revenue from both products and services came in ahead of our expectations. Our bottom line also outperformed, reflecting our continued focus on improving profitability. These results highlight healthy demand across our end markets and solid execution by our team around the world. This quarter also proved the effectiveness of our ramp readiness strategy. By planning capacity ahead of demand, we execute on the operational agility required to accommodate excessive orders and deliver them on time. AI demand continues to deliver strong investment across the semiconductor ecosystem, with the world's leading chipmakers and equipment companies expanding capacity to support multi-year AI growth. As AI shifts from training to everyday use, it is creating demand across the entire chip stack. Leading-age foundries are adding capacity on new nodes. Memory makers are adding cleanroom space and fab capacity for DRAM and next-gen HBM. And advanced packaging is growing rapidly to fulfill the HBM demand. These are the areas where UCT is the strongest. And as volume and complexity increase, our customers rely even more on our subsystems and engineering expertise. Based on the visibility our customers are sharing with us, we now expect 2027 wafer fab equipment spending to be above $200 billion. That outlook is grounded in what we can see and measure. The signs that influence our decision-making are the lens of our customers' forecast, the fab utilization, and the availability of critical components across the supply chain. Today, all three remain healthy for us as our business continues to scale. We are prepared to anticipate and manage supply chain excursions. Because we've had support by real-time visibility from our internal systems and from our customers, we can identify potential constraints early and address them quickly, so our customers' ramp continues uninterrupted. In a tight supply environment, that reliability is one of the most valuable performance we continue to deliver to our customers. Through our UCT 3.0 strategy, we're using the up cycle not only to expand our capacity, but to strengthen our technical capabilities and accelerate our response time. Ramp readiness is driving disciplined growth. NPX is deepening our co-innovation partnership with our customers. And digital transformation is improving our operational efficiency and speed. Being ramp ready is fundamental to our customer-first mindset. Ensuring we have the capacity and supply chain in place before our customers need them. The 26,000 square feet of clean room space expansion we bailed out in Malaysia came online earlier than anticipated, which helped us to outperform this quarter. And over the next few quarters, we expect to double our weldment capacity in Cebu, Philippines, and to bring additional cleanroom capacity online in Singapore and the Czech Republic. We also expect to double our vertical integrated manufacturing capacity in Malaysia and Thailand next year. This helps address the critical component constraints that are limiting the industry today. By producing more of these components in-house, we gain greater control over our supply, improve on-time delivery to our customers, and position UCT to capture additional share during this ramp. Our NPX initiative continues to make solid progress within our growing center of excellence. Recently, we secured eight new program wins across H, ALD, PVD, and lithography applications, spanning gas delivery, thermal and other critical subsystems a similar number of programs are now moving through development and qualification across edge deposition lithography and metrology co-annovating earlier with our customers transcends our position to be qualified as the first supplier and to capture more high-value content per tool. We expect these programs to gain momentum as our customers advance through their technology roadmap and know transactions in the coming years, and our product roadmap are fully aligned with our customers. Digital transformation is helping us scale more efficiently our initiatives are focused on the processes which we can make the most impact starting with the pull to fulfill the core of our value chain we've also launched an integrated planning platform that links demand supply inventory and capacity in real time In a tight supply environment, keeping materials moving smoothly between our customer, UCT, and our suppliers is critical. And it is equally important that data move just as smoothly to enable the smooth material flow. This platform we launched automates that exchange. so when the customer demand changes, we can pass that signal quickly through our supply chain and respond with speed and agility. We believe UCT has become a more strategically important partner to the world's leading equipment companies in manufacturing, in engineering, and in service. Our objective is unchanged to move fast, stay agile, and deliver what matters most to our customers. Continuing to execute on those principles will create sustainable long-term value for our shareholders. Before I hand the call over, I'd like to formally welcome mike to uct he has already made significant impact working very closely with our leadership teams on operating discipline footprint optimization capacity planning and our digital transformation initiative we're very glad to have him on the team mike now over to you for the financial review.

Thank you, James, and good afternoon, everyone. I'm pleased to join you for my first earnings call as UCT's Chief Financial Officer. I join UCT because I see compelling growth opportunity as the semiconductor industry enters what we believe are the early stages of a multi-year growth cycle. This is an exciting inflection point for our industry, and UCT's deep technical capabilities and long-standing customer relationships position us well to support the demands we're seeing today and the opportunities ahead. My priorities will center on strengthening execution and disciplined capital allocation. That includes driving cash conversion and building the financial processes and capabilities to support UCT as we scale. With that, let me turn to our quarterly financial results. In my prepared remarks, I will be referring to non-GAAP numbers only. As James mentioned, the third quarter marked another period of strong performance for UCT with top and bottom line results above the high end of our guidance. Revenue was $759 million, a record quarter, up 17.7% sequentially and 48.8% year-over-year. Gross margin was 17.3%, up 60 basis points from last quarter, and operating margin was 9.0%, up from 7.0% in Q2. EPS was $1.15, up 45 cents over the prior quarter. Semiconductor products represented 86% of total revenue, including 52% from Foundry and Logic, and 34% from Memory. Services represented 10% of revenue, while non-semiconductor markets accounted for the remaining 4%. Our two largest customers contributed 61% of total revenue. Products revenue was $681.9 million, up 19.1% sequentially. The increase in sales was driven primarily by strength in etch and deposition, supporting gate all around, and high bandwidth memory, which positions us well for the current wave of no transitions as the industry ramps. Services revenue was $77.1 million, up 6.7% sequentially on strength across both our OEM and FAB customers. Services revenue growth traditionally lags products as increases are tied to wafer charts. We expect services revenue to increase incrementally over time as the new U.S. FABs come online and ramp, with a larger contribution as wafer charts increase throughout 2027 and 2028. Our revenue follows the same underlying demand as our largest customers, but not always quarter-to-quarter. Timing differences can be caused by product mix, where our content is integrated, shipping flows, revenue recognition, and fiscal calendars. Historically, averaged as a group, we track in line with our customers and expect to perform in line with WFE growth. Total gross margin was 17.3%. Products gross margin was 15.9%, up from 15.1% in Q2, and services margin was 30.1%, up from 28.9% in the prior quarter. The improvements were driven by increased volumes and stronger contributions this quarter from our higher margin product lines. Margins can vary quarter to quarter with fluctuations in volume, mix, region, materials, and freight. We continue to see a path to our target of 20% gross margin at $4 billion of revenue. Driven by higher volume and utilization, a growing mix of higher-value engineered products, increased vertical integration, and more production in lower-cost regions. These gains will build steadily rather than in large steps, and capacity expansions may be a temporary headwind as each phase comes online. Operating expense was $62.9 million, or 8.3% of revenue, compared to $62.5 million, or 9.7% of revenue in Q2. Total operating margin was 9.0% of 200 basis points over Q2. By segment, products improved to 8.5% from 6.5%, and services increased to 13.6% from 11.2% in the prior quarter. Our tax rate was 20.0%, and EPS was $1.15 on 46.2 million diluted shares. Operating cash flow was negative $42.3 million, reflecting demand acceleration and the working capital required to ensure timely delivery to our customers. Inventory was $723.3 million, up $93.4 million from prior quarter. During this upcycle, we have been building inventory, including pre-ordering critical components and maintaining elevated levels of safety stock to help mitigate potential supply chain disruptions and continue to meet or exceed customer delivery expectations. expectations. Through our ATM equity program, we sold 432,000 shares in Q3 at an average price of $80.13, which resulted in approximately $34 million in net proceeds. In the first week of the fourth quarter, we sold an additional 2.2 million shares under the program at an average price of $78.45 and received another $169.1 million in net cash proceeds. We used a portion of these proceeds to pay off the outstanding balance on our revolving credit facility. Currently, we have $193 million remaining of the $400 million ATM program. We ended the quarter with $270.9 million in cash compared with $255.9 million last quarter. Now, let me turn to capacity because this is a very important driver of our growth plan. I'll cover where we are today, what comes next, and how we manage the risk. During the quarter, we accelerated capacity expansion and now expect to be at approximately $4 billion of capacity in Q1 and see a path to additional capacity and increased utilization through further optimization of our current footprint through 2027. In addition, we continue to have about 15% to 20% burst capacity to bridge us to our next phase of expansion. Growing to $5-plus billion will require additional capacity beyond our current footprint. We anticipate investing roughly $80 million to $100 million incrementally through 2027 and 2028 to support this expansion. We are in conversations with our customers to help identify strategic locations that align with their long-term roadmaps. Taken together, our current footprint supports the next phase of growth, and we will add capacity for $5 billion and beyond in phases, pacing our investment to customer demand. Now to our outlook. For the fourth quarter, we expect revenue of $800 to $860 million, up 9.4% sequentially at the midpoint, and expect EPS of $1.11 to $1.35 on approximately 48.9 million diluted In summary, we delivered excellent results on solid execution. We have the capacity in place for our next phase of growth, and we will continue to execute on our UCT 3.0 strategy with the agility and discipline the cycle demands. And with that, operator, please open the call for questions.

Thank you. And ladies and gentlemen, we will now begin the question and answer session. To ask a question, you may press a star followed by the number one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press a star followed by the number two. And your first question comes from the line of Timothy Arcuri with UBS. Please go ahead.

Thanks a lot. So, James, you're expanding a lot, you know, obviously to support this ramp. And you're also, you know, investing lots of money. Mike, you talked about investing another 80 to 100 million dollars. I'm sure your customers will help you with that. But what sort of assurances? I mean, this is a lot of money that you're investing. And so how do you think that this on the other side of this? Is there some way that you can be part of their preferred program that you ensure that you'll gain share through this? Is there something that you're getting in exchange for investing all this money? I mean, obviously you want to help them, but is there some other thing you can do to make you even stickier with them and cause you to gain some share? Thanks.

And Tim, I think that you see that the whole industry is really looking for long-term agreement, starting from our customer's customer. And so our customer also look at, you know, the supply chain resilience they mentioned in our earnings call. So with that, we actually have very open and constructive discussion with our key customers. and we really kind of try to engage with them early on so that the future forecasts are shared and the future demands are really kind of openly discussed and that the future hypothesis we're going to add are going to be fully utilized by our key customers.

Yeah, I guess just on that point, James, so if I, Mike, it sounds like you're expanding to more than $5 billion worth of capacity. So that translates to like $330 billion in WFE. I mean, that's much higher than what people think 28 is going to be. So obviously you must be getting signals from your customers to go out and spend this money. Otherwise you wouldn't be doing that. So is that an unreasonable sort of estimation of where WFE is going? And it sounds like that capacity is going to be in place to support 28. Is that right?

So, just a small correction, Tim. So, if you do really kind of proportionate ratio our revenue to the WFE, so our $5 billion round rate is approximately to $250 billion WFE. So, that's kind of well in line with even your own forecast, right? So, most of the analysts, I don't think any of the customers give a clear WFE number. beyond 27. But as you can see that most of the analysts gave $250 billion WFE in 2028, and we don't see a reason not to agree.

Okay. All right. Thank you.

And your next question comes from the line of Charles Shi with Nidhem. Please go ahead.

Thanks for taking my question. Hey James, hey Michael. So maybe the first question about the supply chain excursion, we've heard your largest customer a week ago talk about the supply constraints, holding them back a little bit. That did it come across as a surprise, at least to me, like I would think supply chain excursion, like you said, it will happen, but maybe not to the degree this early. But what exactly you see are the potential supply chain excursions right now? And specifically, there have been a good amount of chatters about mass flow controller, MFC shortage, and how are you navigating through that? From your numbers, your reporting numbers this quarter, and your guidance for next quarter, clearly you don't look like the one holding your customers back, but want to get your thoughts.

Thank you.

I think that this was probably discussed in our industry at this moment. As I mentioned just before, you know, when you see the industry grow at more than 10% quarter-to-quarter growth rate, the supply chain will continue to face increase in pressure. So, excursion will happen. It did happen. I think, as Mike mentioned, we actually really kind of proactively position ourselves by always having excessive capacity one to two quarters ahead of the demand forecast to stock, supply chain excursions. So that operation agility and supply chain resilience help us to manage, not miss dropping demand. And that customer pushed how we managed this supply chain excursion when we'll continue to do so.

Thanks. Maybe a follow-up that actually still goes back to the MFC shortage. James, any thoughts based on your discussion with the MFC suppliers? Well, given that you actually don't have an MFC business, so kind of imagine that the conversation dialogue with the suppliers may be more candid. But what's the latest, what you hear from them when they think the supply can be more imbalanced, more matching demand, when the supply can catch us on to the very rapidly growing demand for MFC?

Yeah, I think that the MFC constraints may continue for a quarter or two. But we definitely see that, you know, at the end of the day, the industry will address that challenge collectively. And, you know, closely communication with our customers and also with our suppliers will help us to smoothen that challenge. And really, the collaboration and the partnership matters the most at this moment.

Thank you. And your next question comes from the line of Krish Sankar with TD Cowan. Please go ahead.

Hi, this is Robert Mertens online on behalf of Krish.

Congratulations on the strong quarter and guide. So my first question you sort of have addressed just on the component shortest side, but maybe going along with that, if you could just expand a bit on what areas you're co-innovating with customers, You know, where you think the customized approach adds the most value, sort of how do you weigh those opportunities against expanding your manufacturing capacity and flexibility, you know, being able to actually ship what the customers want in addition to making sure that you have a long runway with the product roadmap?

Great question. I think that we definitely do both, right?

So immediate need to really demonstrate our long-term partnership with our customers really fulfill their ramp request by really fast fulfill the demand that really kind of increase quarter by quarter right now. And we're doing well on that. So in terms of, you know, the MPI engagement with our customers, so we did launch the Center of Excellence on MPIs in Hillsborough, leveraging our acquired company called HPIS. So the engineering capability and the prototype manufacturing capability there gave us a really very flexible capability to co-work with customers on their new product development. And by utilizing that, as I mentioned in an announcement, we were able to really successfully engage on eight MPI programs with customers, spread over different product lines at the customer side. What it does is really fully aligned with customers' future product roadmap. we'll see those most likely get productized on the next node MPI the customer is going to commercialize in the next two to three years, and we'll have a meaningful margin expansion and share again when we have that into the high-value production mode. At the same time, I think we also continue to engage with customers, getting into their design phase. So changing our integration mode from build to print, our stickiness and technology collaboration with our customers and pull our share is very helpful.

Thank you. And your next question comes from the line of Edward Young with Oppenheimer. Please go ahead.

Hi, James, Mike. Thanks for the time. My question's also on supply chain, and congrats on your execution there. Understanding that UCT is delivering on time, could delays in other suppliers' components prevent customers from completing systems, and would that ultimately affect you? Just want to better understand that.

Yeah, thanks for the question. Is your question related to our suppliers and whether they're going to any subsystems that may impact our ability to ship?

No, I'm saying if there are competitors or others in the ecosystem that might have these excursions, even if you're executing, when they're going into the end system, with excursions elsewhere, could that affect UCT?

Yeah, so right now, we're not seeing that.

As James mentioned earlier, we did not, you know, we were not gated by anything last quarter. We didn't miss a shipment. You know, there continues to be a lot of pressure in the supply chain, and we do have to look out for that. And we've been thoughtful about where that may come from. You know, with our, as we're seeing increasing revenue, we have been buying ahead and ensuring that we have our strategic supply met. You know, I think we have to continue to stay diligent for it. We're, when we've looked at our Q4, we've taken some of that into account, but I, you know, where we think that risk may come from. But right now, I still feel like we're pretty well positioned for that, and that's not going to play into our ability to.

And my follow-up questions on your large DEP customer recently announcing an expansion into optical inspection. Are you seeing any opportunities opening up for new subsystem or engineering opportunities for UCT? And are you engaged in supporting any of these new platforms?

Ed, as you know, we actually have all the major WFE customers as our existing customers. So we are familiar with the optical inspection system and also the lithography systems. If you break down into the subsystem level, there are a lot of similarities. And so, therefore, yes, we will have new opportunity as a customer for that optical inspection.

Thank you very much. Thanks, Ed.

And your next question comes from the line of Christian Schwab with Greg Halen. Please go ahead.

Guys, this is Ben Taxon for Christian. A lot of my questions have been answered, but I got one left for you. And, you know, this call, very positive commentary and last call, you know, know this call almost maybe even seems more positive um compared to last call so how i guess are you guys thinking about it like that as well as well in the environment going forward and then kind of tying to that um specifically what is the conversations been like with customers kind of over this last quarter and and how they evolved and has it been extended out i mean you guys it seems like you have some capacity pull forward and such so can you just articulate that that?

Yeah, I think that the sentiment does not change that much.

I think it's just that we execute pretty well. Maybe that makes a little bit different, right, in terms of the results and the outlook. And the customer side, I think that you'll hear them saying that it's the 2027 is solid, above $200 billion. That's really more confirmed compared to a wider range a quarter ago. I think $27 billion is more solid. It's probably one thing we can say now. And the second thing is that we start to hear from, you can also hear from the earnings call that $28 billion is more or less booked as well.

So you see different numbers, but what I see is, but, you know, at 28 is coming to life a little bit more. All right, that's all I got.

And also, I think that you also hear the news that there's a new factory announcement.

I appreciate it. Thank you.

Thank you. And I'm showing no further questions at this time. I would like to hand it back to James Hsiao for closing remarks.

This is our Q326 earnings call.

Thank you all for joining us, and I will see you all in the next quarter.

Thank you, presenters. And ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.