Earnings Call Transcript - UCTT Q1 2026

Operator, Operator

Good afternoon, ladies and gentlemen, and welcome to the UCT Reports First Quarter 2026 Financial Results Conference Call. Operator instructions. This call is being recorded on Tuesday, April 28, 2026. I would now like to turn the conference over to Rhonda Bennetto, Investor Relations. Please go ahead.

Rhonda Bennetto, Investor Relations

Thank you, operator. Good afternoon, everyone, and thank you for joining us. With me today are James Xiao, CEO; Sheri Brumm, CFO; and Cheryl Knepfler, VP Marketing. James will begin with some prepared remarks about the industry and highlight some of the opportunities ahead for UCT. 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. Also, beginning this quarter, our non-GAAP results now exclude the impact of unrealized gains and losses on foreign exchange and our revised reference to prior periods was included in our fourth quarter earnings press release back in February. And with that, I'd like to turn the call over to James. James, please go ahead.

James Xiao, Chief Executive Officer

Thank you, Rhonda, and good afternoon, everyone. We appreciate you joining us for the Q1 2026 earnings call. In my prepared remarks, I will provide my thoughts on the near and longer-term market drivers and highlight where UCT has a clear competitive advantage to capitalize on a variety of opportunities during this multiyear up cycle. Following that, Sheri will provide a financial update, and then we will open up the call for questions. We started the year out strong and delivered revenue and earnings above the midpoint of our guided range for the first quarter, driven by solid execution across a broad set of products, services and customers. As you can see in our Q2 guidance, we're seeing momentum build across the semiconductor landscape, supported by growing industry-wide investments in AI-driven computing. I'd like to acknowledge our global teams for the sense of urgency, focus and operational excellence they continue to demonstrate every day. Their commitment to our customers and to driving continuous improvement is elevating our performance today and positioning UCT to compete and win in the next phase of AI-driven growth. The rapid expansion of AI infrastructure is fueling increased investments across the semiconductor ecosystem, with hyperscalers and cloud providers expected to deploy significant data center capacity by spending around $600 billion in 2026, driving demand sharply higher. Investment by memory companies to address the bottleneck will remove a major constraint to the overall server supply chain, increasing foundry unit demand to support this growth. AI data center growth is being fueled by the rapid adoption of generative and agentic AI, and we're now seeing the early impact of physical AI as well. This new wave is driving increased demand for AI memory and leading-edge foundry logic, further accelerating fab capacity investments. These investments are driving the surge in WFE spending, with notably strong demand in leading-edge foundry logic, high-bandwidth memory and advanced packaging, all critical enablers of AI workloads. Increasing device complexity is driving higher process and equipment intensity, especially in deposition and removal, sustaining the WFE cycle and expanding UCT's opportunity. Demand continued to build week by week, and we expect this momentum to increase as customers gain clarity on fab timelines, delivery schedules and ramp readiness. Long-term customer forecasts and capacity requests reinforce our confidence in continued WFE demand growth with our services business directly tied to wafer starts. We are also seeing increasing wafer volumes across IDMs and foundries, driven by AI demand and ongoing fab expansions with higher tool utilization, creating a durable multiyear growth tailwind for our service business. We're aligned with our customers and industry sentiment that we're in the early stage of a multiyear cycle that should accelerate into the second half of this year and beyond. Strong demand is occurring alongside emerging supply side constraints, including clean room capacity and the time required to bring new fabs online. As a result, today's environment is driven not only by demand, but also by the industry's ability to scale efficiently. By executing on our UCT 3.0 growth strategy, we are strategically positioning to win in this environment. Ramp readiness remains a top priority under UCT 3.0. We are executing with urgency and a customer-first mindset. We align our teams, systems and supply chain to deliver with speed, quality and consistency. We see the AI-driven ramp as a meaningful opportunity to drive growth and expand margins through improved utilization and more efficient operations and infrastructure. In parallel, we're advancing our MPX strategy, new product introduction, development and transition to accelerate time to market through our global centers of excellence. By co-innovating earlier with customers, compressing NPI cycles and strengthening responsiveness and supply chain resilience, we are enabling faster ramps to high-volume production near our customers. This positions us to execute at speed and scale, supporting incremental share gains as customers prioritize development velocity and ramp speed, while driving UCT's operating leverage and margin expansion through higher volumes, improved mix and greater efficiency. Supporting ramp readiness and MPX, we're making strong progress on our third UCT 3.0 initiative, digital transformation. We are upgrading our systems, processes and data infrastructure with AI-compatible solutions to improve visibility, reduce cycle times and increase productivity, while enabling faster customer response. These efforts are strengthening our foundation for AI-enabled operations, increasing agility, driving productivity gains and transforming UCT into a more scalable enterprise aligned to capture growth in this multiyear AI-driven industry upturn. Our global footprint supports around $3 billion in revenue today and can scale up to $4 billion with modest incremental capital investment. Assuming continued progress in workforce development, strategic supply chain and operational scaling, we do not expect infrastructure capacity to be our constraint. As volumes ramp, this should allow UCT to drive stronger operating leverage, improve profitability and create sustainable value. In closing, while the long-term outlook remains strong, the near-term environment remains dynamic with variability across customer spending, potential supply chain constraints and geopolitics. In this environment, disciplined execution will define the winners. With our trusted partnership with key customers, strong ramp readiness and a global footprint that enables speed, agility and scale, we believe we are well positioned to capture an outsized portion of the opportunities ahead of us. I will now turn the call over to Sheri, who will summarize our first quarter results and update you with our second quarter guidance. I look forward to your questions following the financial summary. Thank you.

Sheri Brumm, Chief Financial Officer

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, we are seeing increased momentum from the early stages of a multiyear AI-driven expansion, and we're executing with urgency to support customer ramps while maintaining a strong focus on operational efficiency, cost discipline and margin improvement. For the first quarter of 2026, total revenue came in at $533.7 million compared to $506.6 million in the prior quarter. Revenue from products was $465.7 million compared to $442.4 million last quarter. Services revenue was $68 million in Q1 compared to $64.2 million in Q4. Our global footprint supports about $3 billion in revenue today and can scale to approximately $4 billion with modest incremental capital investment. With ongoing progress in workforce and operational scaling, we do not expect capacity constraints. As production increases over time, we would expect to benefit from improved operating leverage and corresponding margin expansion. Total gross margin for the first quarter was 16.5% compared to 16.1% last quarter. Product gross margin was 14.6% compared to 14.1% in Q4 and services was 30% compared to 29.7% last quarter. Gross margin improved primarily due to better product mix and 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 $61.1 million compared to $56.6 million in Q4. As a percentage of revenue, operating expenses were 11.4% versus 11.2% last quarter. Total operating margin for the quarter came in at 5.1% compared to 4.9% last quarter. Margin from our products division was 4.2% compared to 3.9% and services margin was 11.5% compared to 12.4% in the prior quarter. The first 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 the low 20% range. Based on 46.3 million shares outstanding, earnings per share for the quarter were $0.31 on net income of $14.5 million compared to $0.24 on net income of $10.9 million in the prior quarter. During the quarter, we made the strategic decision to further strengthen our balance sheet and meaningfully reduce our ongoing cost of capital. In February, we priced a $600 million offering of zero-coupon convertible senior notes. We used a portion of the proceeds to fully repay our Term Loan B, reducing our annual cash interest expense by approximately $30 million. Subsequent to quarter end, we refinanced and upsized our revolving credit facility from $150 million to $250 million, reduced the interest margin by 75 basis points and extended the maturity to 2031, further enhancing our liquidity and financial flexibility. Together, these actions are expected to reduce our weighted average borrowing rate from around 6.2% to approximately 1.4%. Turning to the balance sheet. Cash and cash equivalents were $323.5 million compared to $311.8 million at the end of last quarter. Operating cash flow was negative $33.3 million this quarter compared to positive $8.1 million last quarter, driven primarily by higher working capital as we build inventory to meet near-term demand and support future growth. We are seeing broad-based improvements across the semiconductor landscape heading into the second half of this year and beyond, underpinned by sustained industry investment in AI-driven computing. We remain focused on maintaining discipline around margin expansion and driving sustainable shareholder returns over time. Turning to the guidance. For the second quarter, we project total revenue to be between $565 million and $605 million and EPS in the range of $0.44 to $0.60. And with that, I'd like to turn the call over to the operator for questions.

Operator, Operator

Operator instructions. Our first question comes from the line of Charles Shi from Needham.

Charles Shi, Analyst (Needham)

Maybe the first question, James, what's the WFE outlook you are seeing as of today? And I think in your prepared remarks, there's a line you mentioned you talked about solving the memory bottleneck and the relation to how that increases foundry unit output. And I'm not sure the context of that line. And are you kind of implying maybe the memory WFE growth is pretty high today, maybe some of that strength will transition more to the leading-edge foundry logic? I'm not sure what you meant by that line, but can you elaborate a little bit while you address the WFE outlook question.

James Xiao, Chief Executive Officer

Thanks, Charles. Yes, so the WFE outlook is really continuing to grow bigger than we saw the previous quarter. We see from our customers that they're quoting $140 billion to $145 billion in 2026. So that's dependent on where you see the '25 number end up with at 18% to 20% year-over-year growth. And we see similar momentum. The customers are talking about 15% and above for 2027. So to your question about the memory growth, I think that we saw that AI capacity was somewhat gated by the memory capacity in the past three to four quarters. Now we see that all the major memory customers are investing in their greenfield factories and also upgrading their existing fabs to maximize their current footprint. That actually gives the whole industry an unlock of the constrained capacity. So we see more new leading-edge factory launches in basically all three leading customers, TSMC, Intel and Samsung.

Charles Shi, Analyst (Needham)

Got it. So maybe the second question, James, I understand that the outlook is getting stronger on a week-by-week basis. You gave a special shout out to etch and deposition, and I think that's well understood. But is there any part of your end markets that may still be a little bit slow, maybe even on a relative basis? I didn't hear you talk about lithography. I didn't hear you talk about your domestic Chinese customers. So what's going on there in those areas?

James Xiao, Chief Executive Officer

Yes. I think that's a very good question. If you look at the fast-growing segments in WFE overall, they are leading-edge foundry logic, HBM on the memory side and advanced packaging. So those are more etch and removal intensive in terms of capital intensity. Therefore, relatively, our customers are saying that in the first half, deposition and etch account for mid-30s percent of WFE, and in the second half, they see that increase to the high-30s percent of WFE. Because these high-growth areas are etch- and deposition-intensive, we see a higher share of deposition and etch in overall WFE. The flatter area we see is probably the non-deposition and non-etch segment overall. And, surprisingly, trailing-node foundry logic is also not declining; it's more flat. Regarding China, as we discussed before, there was a build of inventory and safety stock in '24 and '25, which increased their portion of worldwide WFE to 35% to 40%. Now we're seeing that return to a more normal level in the low 20s as a portion of worldwide WFE. So I don't think that's an outlier; it's more a return to normal business levels.

Charles Shi, Analyst (Needham)

Got it. Maybe the last question from me, if I may. If I understand the typical behavior of your customers correctly, I think this is a year when they are competing for basically who can ship tools faster to their customers. How do you assess in this kind of situation whether the requests coming from your customers are reasonable, or if there's any chance some of the requests you would see are unreasonable and potentially at the expense of growth in your outer years? How do you handle situations like that in terms of how you allocate your capacity and grow your capacity, et cetera? Just a little bit of high-level philosophy to understand how you operate in an environment like this.

James Xiao, Chief Executive Officer

This is a great question. I see a very healthy dynamic in the industry. Customers are giving us long-term forecasts, so we can plan better. The long-term forecast is showing growth momentum and gives us confidence to utilize our current capacity and plan for the next expansion steps. As I mentioned in prior calls, we have capacity to run at a $3 billion run rate per year. The current run rate is still around $2 billion to $2.2 billion, so we have runway to address additional demand. Our brick-and-mortar capacity can handle up to $4 billion. By minimal capital investment, we can build that additional capacity in about six to nine months to reach the $4 billion run rate. So in that sense, we're well positioned to address incremental demand from our customers.

Operator, Operator

Our next question comes from the line of Krish Sankar from TD Cowen.

Robert Mertens, Analyst (TD Cowen)

This is Robert Mertens on the line on behalf of Krish. I guess the first one is just around your domestic China business. Do you have a percentage of sales figure you could share for the March quarter? And just how you sort of expect that portion of your business to trend given that the current semi-cap customers in China have been doing pretty well.

James Xiao, Chief Executive Officer

Yes. As we previously discussed, the percentage of our domestic China business is less than 5% of our overall revenue. We expect to maintain that range. We also see that the domestic Chinese WFE customers will gradually increase their share within the China WFE market, and we see growth opportunity as we grow our share with those Chinese customers.

Operator, Operator

Our next question is from Christian Schwab from Craig-Hallum Capital Group.

Christian Schwab, Analyst (Craig-Hallum Capital Group)

Great. Congrats on the great quarter and outlook. Given the demand is improving week by week, I guess it's kind of crystal clear. But as you look at the year, do you have an idea of what percentage of revenue will be second-half weighted versus the first half?

James Xiao, Chief Executive Officer

Great question. As you can see in our forecast, we're seeing close to double-digit growth quarter-over-quarter from Q1 to Q2. We expect a similar range of growth going forward into the second half.

Christian Schwab, Analyst (Craig-Hallum Capital Group)

Perfect. And then can you give us—given $4 billion in revenue driven by increased WFE, and finally seeing a very material increase in wafer starts to drive your services business—when you talk about $4 billion in revenue potential and another $1 billion that could be added given a modest amount of capital and notice to put that online, what would you anticipate would be your mix of revenue at $4 billion that would be services?

James Xiao, Chief Executive Officer

Good question. Our service revenue is a function of wafer starts and a smaller portion is directly correlated to WFE growth. In aggregate, we expect double-digit growth for the year on the service side, and going forward we expect services to represent a range around 10% to 12% of our overall revenue.

Christian Schwab, Analyst (Craig-Hallum Capital Group)

Great. And then lastly, historically, if we go back to 2020 and 2021 during the last accelerated WFE spending cycle, you outgrew WFE growth materially. Should we assume a lag period between installing fab equipment and wafer starts being finished, which is the driver of your services business, is the primary way to think about your growth outperforming WFE? Or do you think this cycle you're better positioned for market share gains?

James Xiao, Chief Executive Officer

We expect to grow with overall WFE growth and see upside potential on both product and service sides. Our playbook is to defend the core, grow the available market, and enter into adjacent modules and gas panel businesses as customers expand their product portfolios. We also focus on winning at inflection points by strengthening our NPI capabilities to align with customers' NPI roadmaps and win at the next node inflection.

Operator, Operator

Our next question is from Edward Yang from Oppenheimer.

Edward Yang, Analyst (Oppenheimer)

Just first question related to that strong second quarter guide on the revenue side and for the remainder of the year, how should we think about gross margin progression?

Sheri Brumm, Chief Financial Officer

Gross margin should continue to improve as we move through the year. We'll likely see a slight increase in Q2 and then continued growth as we move through the year if revenue increases. Mix and shipping geography will play a role and things can change, but we expect margins to move up as we approach Q4.

Edward Yang, Analyst (Oppenheimer)

Sheri, if I could dig a little deeper related to mix. You have a variety of different products and services. Just focusing on the product side, what are the gross margin differentials between your lowest and highest? What are your highest-margin products and can you provide some detail around that?

Sheri Brumm, Chief Financial Officer

We don't publish specific product margins. We have a wide bell curve of margins that can range roughly from low double digits to as high as 50% to 60%, depending on whether it's a component part, a module or a gas panel. The overall gross margin depends on the volume mix, how quickly revenue ramps, and how fast we can hire labor and scale other associated costs. Those factors are the key drivers of margin as revenue grows, and because there are many different products with different margins, it's complicated to detail every individual product margin.

Edward Yang, Analyst (Oppenheimer)

Got it. And maybe a question for James. Beyond the general uplift in WFE, you mentioned your UCT 3.0 strategy. I know it's a long-term vision, but can you comment on progress around co-innovation and the MPX framework? How has customer receptivity been, and when might we expect to see specific market share gains or new module wins from that framework?

James Xiao, Chief Executive Officer

We're investing in regionalized Centers of Excellence. We have an NPI Center of Excellence in the U.S., we've enhanced that, and we're expanding NPI capabilities in Asia and Europe. Customers want engineers to co-innovate, define specs and design systems and modules close to their core engineering teams—in Europe and the U.S., and we're expanding that in Asia. We then transfer that work regionally to our high-volume manufacturing sites and distribute across regions. This aligns with customer strategies as they move engineering close to high-value production sites. Customer receptivity has been strong, we've seen early momentum and it's accelerating NPI engagement with existing customers. We already have a strong pipeline of NPI engagements that this regionalized Center of Excellence model further enhances.

Operator, Operator

Our next question is from Krish Sankar from TD Cowen.

Robert Mertens, Analyst (TD Cowen)

I realize I put myself on mute after my first prior question. My second question was going to be around the margin profile, but you just answered it. So I won't make you repeat yourself.

Operator, Operator

I'd like to turn the call back over to Sheri Brumm for an announcement.

Sheri Brumm, Chief Financial Officer

Thank you, operator. I have an announcement to make, and I wanted to share it on this call because I personally know many of you here today. After a lot of thought, I've decided to retire from UCT. Being part of UCT's journey over the past 17 years has been an incredible privilege. I'm incredibly proud of what we've built together, and I'm deeply grateful for the trust, partnership and support of our teams, our leadership and our Board. I'm confident that UCT is ideally positioned for continued growth and success in the years ahead. I'll remain fully engaged until we find my successor, looking both internally and externally, and I'll continue behind the scenes to ensure a smooth transition. Thank you for making this journey meaningful and rewarding for me. I really appreciate the support many of you have given to me over the years. And with that, thank you for joining our call today, and we look forward to seeing you when we report our second quarter earnings. Thanks.

Operator, Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.