Ultra Clean Holdings, Inc. (UCTT) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the Ultra Clean Q2 2026 Earnings Call. [Operator Instructions] This call is being recorded on Monday, August 3, 2026. I would now like to turn the conference over to Rhonda Bennetto of Investor Relations.

Thank you, operator. Good afternoon, everyone, and thank you for joining us. With me today are James Xiao, CEO; Sheri Savage, CFO; and Mike Keogh, CFO beginning August 5. 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. 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 Q2 '26 earnings call. This afternoon, I will discuss industry environment and the trend is 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, Sheri 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 reshipped the semiconductor capital equipment landscape, driving increased volume and complexity in the systems and components our customers require. As agentic AI become more mainstream, the incremental demand extends well beyond today's GPU-intensive training clusters, we influenced 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 and HVM. As volume and complexity increases, customers are engaging more strategically with trusted partners like UCT earlier in the development cycle to help ensure manufacturing readiness and accelerated execution. Use technologies advance we're confident that we will play an even more important role in our customers' long-term technology road maps 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 investments that support their product pipeline. As AI infrastructure scales, execution speed and innovation velocity at scale will send UCT apart from the complication. Our customers with 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. The 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 couple of months, we have built 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 $4 billion annualized revenue run rate of $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 a $5 billion revenue run rate of $250 billion WFE. We will continue to align our investments with our customers' long-term demand outlook and commitment. Our NPX initiative, which integrates new product development, introduction and transfers reached a significant milestone recently. We have launched our first MPX Center of Excellence in Hillsboro, 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 the preferred co-innovation 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 enable 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 Sheri's last earnings call as CFO of UCT. I'd like to take a moment to recognize and thank Sheri for her 17 years of dedicated service to UCT. Sheri has been a trusted leader and an exceptional steward of our business, helping guide the company through the period of significant growth and transformation while strengthening our financial foundation. On behalf of our Board of Directors and the entire UCT family. Thank you, Sheri, for your many contributions unwavering commitment to the company. We wish you all the best in your well-earned retirement. Over to you for the financial review. Thank you.

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 Keogh, 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 $62.5 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 Products 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 the 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 in 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 million and $750 million and 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.

[Operator Instructions] Your first question comes from the line of Timothy Arcuri from UBS.

Just on the guidance, it was quite good, but it could have -- it was 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 that systems are going to grow like 30% Q-on-Q in calendar Q3. I realize your product revenue outgrew their systems in June. So is it really just a timing thing? Or do they have some inventory or maybe you're just being maybe arguably a little bit conservative in your guidance?

Yes, it's a little bit of both, Tim. This is James. I think that definitely, you realize that 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 -- their quarter end are a little bit different from ours. So that created a little bit of a timing gap on the revenue growth. But if you aggregate a 2-quarter revenue growth, you will see that our revenue is on par with their growth or higher. .

James. And then we've heard some examples. So all your customers are so full on capacity there. I mean they're basically booking into the back half of '27, if not even some of them out into '28 some of the slots. 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 then maybe that can hear your revenue to the upside just given how full their internal manufacturing is.

Yes. Definitely, we see that upside opportunity, especially when the customer are, to some extent, constrained by their internal capacity. They -- in this upturn, as you know, they intend to focus more on their final test and the final integration capacity and overflow their subsystem capacity to partners like UCT. So heavily historically, we see that our growth opportunity when the customer gave a higher percentage of their subsystem built to UCT in the uptime. So this is why we always see an outgrow attended on the product side in upturn. .

Your next question comes from the line of Charles Shi from Needham.

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 $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 a little bit earlier the mid-'27? Or what's the range of possibilities of what's the buyers? And on the $5 billion, what do you have to see to pull the trigger to really start that expansion to the $5 billion run rate?

Thank you, Charles. I think that we said that we're taking the phased approach in auto from $3 billion to $4 billion and then from $4 billion to $5 billion, we're executing on that plan. So at the end of the year, you will see a $3.5 billion, we'll see $3.5 billion capacity ready and not really match the run rate we see today. And then in the first half of 2027, we will hit that $4 billion run rate in capacity, and we're going full speed on that. As you see in my statement earlier, we're actually adding 26,000 square feet in Malaysia site, and we're doing similar things in our Singapore and Czech Republic site. So we will get the $4 billion in the first half of '27. For the $5 billion run rate or to address a $250 billion WFE we're actually evaluating the new expansion plan in Southeast Asia, and we'll make that decision pretty quickly and start execution. So the time line still as we communicated before in the first half of 2028, will reach beyond the $4 billion, and those capacity will add and you will see the run rate of $5 billion in the second half of '28 million.

James. So that's pretty clear. Sheri, congrats again on the well retirement, glad 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 the margin model going forward. I know the team has laid out a goal of 20% gross margin, 10% operating margin at $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, I think we definitely appreciate that.

It's Sheri. Thank you for the nice comment. I'll be answering calls on this call at this point, but you just talk to Mike later. For the incremental margins, we do see them continuing to move up as we utilize more of our factories. Obviously, we do see us moving towards that 17% range as we move through the rest of the year and hopefully moving beyond that. The $4 billion and 20% gross margin is still the goal that we are marching forward, 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. .

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