Ultra Clean Holdings, Inc.

... ... Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. © transcript Emily Beynon

Good afternoon, ladies and gentlemen, and welcome to the Ultra Clean Technologies fourth quarter 2025 financial results conference call. At this time, all lines are in 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 in Monday, February 23rd, 2026. I would now like to turn the conference over to Rhonda Minetto. Investor Relations, please go ahead.

Thank you, Operator. Good afternoon, everyone, and thank you for joining us. With me today are James Zhao, CEO, Sherry Savage, CFO, and Cheryl Knepler, VP Marketing. 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 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 gap to non-gap can be found in today's press release posted on our website. And with that, I would like to turn the call over to James. James, please go ahead.

Thank you, Rhonda, and good afternoon, everyone.

And thank you for joining us. This is my first solo earnings call as CEO. And as I approach nearly six months in a row, I remain very energized by the opportunity ahead of us. We've spent a significant time across our global sites, meeting with employees, customers, and partners, and have developed an even deeper conviction in the strengths of our team, our strategic position, and have refined our long-term growth strategy and vision, which I now call UCT 3.0. I want to thank our employees worldwide for their focus, resilience, and commitment to operational execution during this transition. Their dedication to our customers and to continuous innovation and improvement is fundamental to our performance, and it positions us well as we enter a new phase of AI technology-driven industrial growth. where speed, scale, and execution will become defining advantages for long-term winners like UCT. As you have heard recently from our customers and their customers, we're no longer preparing for a semiconductor recovery. We're entering a structural expansion of VFRFAB equipment driven by AI infrastructure and physical AI demand. The long-term outlook for the semiconductor market remains very strong. Industry projections now suggest the markets could reach one trillion in annual revenue of semiconductors by 2027, possibly earlier, which is significantly ahead of prior expectations. What we are witnessing is not a normal cyclical upturn. It is an AI technology inflection. The center of gravity has shifted from consumer electronics to AI infrastructure, physical AI, autonomous driving, and other AI applications. The evolving AI roadmap from generative AI to physical and agentic AI and ultimately artificial general intelligence, or AGI. It's driving greater end customer confidence and accelerating investment in AI infrastructure. Stakeholders across the AI ecosystem are investing to support growing AI end market demand. Rising device complexity is accelerating wafer fab equipment spending as the leading aid fabs deploy new materials like molybdenum and new structures such as gate all around and high bandwidth memory. These technologies required tight integrated solutions across deposition and removal with increased DAP edge capacity intensity, which provide a tremendous growth opportunity for UCT. All these market drivers should lead to a multi-year WFE up-term once wafer fabs address their near-term cleanroom constraints. Our technology co-innovation is tightly aligned to our customers' roadmaps. We expect to see strength around etch and deposition, especially ALD and high-precision etch. To support gate or around, and backside power distribution logic transitions, as well as high bandwidth memory, advanced packaging, and greater than 300 layer NAND in memory. This environment demands innovation velocity and operational agility. This is how UCT is positioned today and will continue to evolve to win and create a sustainable profitable growth. This strategic transformation is what we call UCT 3.0. Ramp readiness is our top priority now. We have been preparing for this moment, and this is where UCT has a distinct competitive advantage. Over the past several months, We have been focused on our business to operate with greater responsiveness and sense of urgency, efficiency, and accuracy. Leveraging our global talent and footprint, we're driving operational execution initiatives to ensure we grow as the partner of choice for engineering support, development, and also the manufacturing support. Through facility optimizations over the last several years, we have the capacity in place now to support approximately 3 billion in revenue today, with global utilization currently averaging 65%. Among our worldwide capacity, approximately 50% is currently in Asia, with plans to increase to 60%, which is strategically aligned to support our key customers' global manufacturing footprint. As volumes ramp quarter over quarter, we will be focused on improving operating leverage and generating meaningful margin expansion. While we expect 2026 demand to be second half weighted, and increase into 2027. Customers are encouraging us to position capacity ahead of that inflection. Our largest customers are providing extended visibility, enabling us to align capacity and service infrastructure in advance of increased order activity. In parallel, we have identified and addressed product-specific supply chain and manufacturing constraint to ensure the readiness for a stat function increase in orders. For UCT to support our long-term goal of a $4 billion annual run rate, only modest incremental cleanroom investment will be required. We do not expect infrastructure-related capacity to be a limiting factor during this cycle provided we continue to build and retain the skilled workforce required and leverage automation and the lean capabilities to scale capacity efficiently. Having well-planned actual capacity entering a technology inflection of this magnitude is a strategic competitive advantage. This allows us to support customer roadmaps while capturing pull-in and drop-in opportunities and responding rapidly to urgent need and frequent changes that others may struggle to support. In addition to our ramp readiness initiatives, we're also accelerating the design to production cycle, expanding our participation in high-value new product introductions at the leading age nodes and strengthening strategic technology integration with our customers. A key enabler of this is our expanded NPX strategy, which is comprised of new product introduction, new product development, and new product transition. Together, they will position UCT to a co-innovate earlier, run faster, and manufacturing closer to customers, driving speed, responsiveness, and supply chain resilience at scale. Another important focus area is on digital transformation. By upgrading our systems, processes, and data infrastructure with AI compatible solutions, we are further improving operational visibility shortened cycle times, enhancing productivity and enabling a faster response time to our customers. These digital initiatives set a solid foundation for our multi-year digital transformation drive towards AI enabled IT infrastructure and business processes to enhance operational agility and continuously improve productivity. In closing, we remain focused on reaching our long-term $4 billion revenue target, expanding margins over time, and delivering durable shareholder value as a strategic co-innovator and manufacturing partner throughout the next cycle of technology inflection. We will now turn the call over to Sherry, who will summarize our first quarter results and update you with our first quarter guidance.

I look forward to your questions following the financial summary. 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, we are entering a structural expansion of wafer fab equipment spend driven by AI infrastructure and physical AI demand. I'll now review our fourth quarter and full year results as well as provide our first quarter guidance. For the fourth quarter, total revenue came in at $506.6 million compared to $510 million in the prior quarter. Revenue from products was $442.4 million compared to $445 million last quarter. Services revenue came in at $64.2 million in Q4 compared to $65 million in Q3. For the full year, total revenue was $2.1 billion, roughly flat with 2024 revenue. Due to facility optimization initiatives over the last several years, we have the capacity in place now to support approximately $3 billion in revenue and are currently averaging 65% utilization. We believe that in order for UCT to support a $4 billion annual run rate, only modest incremental clean room investment will be required. We remain focused on aligning workforce capacity with demand while leveraging automation and lean disciplines to drive efficient and scalable growth. Total gross margin for the fourth quarter was 16.1% compared to 17% last quarter. Products gross margin was 14.1% compared to 15.1% in Q3. And services was 29.7% compared to 30% last quarter. Gross margin was impacted in Q4 due to a shift in product mix. Total gross margin for 2025 was 16.5% compared to 17.5% in the prior year. Margins continue to be influenced by fluctuations in volume, mix, manufacturing region, and related tariffs, as well as material and transportation costs, so there will be variances quarter to quarter. As production levels increase sequentially, we expect improved operating leverage and meaningful margin expansion. Operating expenses for the quarter was $56.6 million compared to $57.7 million in Q3. As a percentage of revenue, operating expenses were 11.2% versus 11.3% last quarter. For the year, operating expense as a percentage of revenue was 11.2% compared to 10.6% in the prior year. Total operating margin for the quarter came in at 4.9% compared to 5.7% last quarter. Margin from our products division was 3.9% compared to 4.9%, and services margin was 12.4% compared to 11.1% in the prior quarter. For the full year, operating margin was 5.3% compared to 6.9% in the prior year. Fourth quarter tax rate came in at 21%, 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 45.8 million shares outstanding, earnings per share for the quarter were 22 cents on net income of $10 million, compared to 28 cents on net income of 12.9 million in the prior quarter. For the full year, earnings per share was $1.05 on net income of $47.7 million, compared to $1.44 on net income of $65.2 million in 2024. Turning to the balance sheet, our cash and cash equivalents were $311.8 million compared to $314.1 million at the end of last quarter. Cash flow from operations was $8.1 million this quarter compared to breakeven last quarter, primarily due to working capital management. For the full year, cash flow from operations was $65.6 million compared to $65 million in the prior year. Looking ahead, we continue to see a strong structural backdrop for semiconductors, with industry estimates now calling for annual revenue to approximately $1 trillion by 2027, possibly earlier. We continue to execute towards our longer-term $4 billion revenue goal, with a focus on expanding margins and generating durable shareholder returns. For the first quarter of 2026, we project total revenue to be between $505 million and $545 million. We expect EPS in the range of 18 cents to 34 cents. And with that, I'd like to turn the call over to operator for questions.

Ladies and gentlemen, we will now begin the question and answer portion of the call. If you have a question, please press stars and the number one on your touchstone phone. You will hear a beep that your hand has been raised. If you'd like to withdraw from the polling process, please press star, then the number two. Ladies and gentlemen, we will now begin the question and answer portion. If you have a question, please press star, followed by the number one on your touchstone phone. You will hear a prompt that your hand has been raised. If you would like to withdraw from the polling process, please press star, followed by the number two. If you're using a speakerphone, please make sure to lift your handset before you press any case. Your first question comes from the line of Charles Shi from Needham. Please ask your question.

Hi, good afternoon. Thanks for taking my questions. I want to start with your overall view on WFE. Back in January, I believe you talked about probably low to mid-teens WFE growth. I saw your presentation, there's 125 to 135 billion, a projection in the deck, but they're not so sure about your base numbers. So can you give us a little bit better sense of what's your WFE forecast this year? And on a related question, the Q1 guidance looks like at least on year-on-year, basis, it's at the midpoint of the guidance. It's only up a little bit. So it looks like you may be implying a very, very strong second half pickup. I wonder how the shape of the year could be. Thank you.

Hi, Charles. Let me answer your questions, and then we'll have Cheryl come in. So as I explained to you in the conference a month ago, we see the forecast increase week by week. So right now, our view on the overall WFE is bigger than a month ago. So we're looking at 15% to 20% year over year growth. And in terms of your second question, Yes, we do not see probably what you see the year-over-year, quarter-over-quarter from our customers. But we have a big bump from Q3 to Q4. So if you take the average, the increased rate actually is kind of in line with our customers' growth rate. Okay?

Hi, James. Maybe a quick clarification. You said big bump. Basically, you're saying maybe the run rate, for your revenue run rate, you see like September will be a very strong pickup from June, maybe a strong pickup again from September to December. Is that what you were speaking to? Yeah, thanks.

Yeah, I think that you're right. So look forward. We definitely see a staff function increase in the second half of 26. And that's where we see the over year. We're very optimistic about the whole year growth.

Thanks.

Maybe I may ask a question about the growth margin. Can you provide a little bit color, March quarter, what's the implied gross margin expectation under your revenue and the EPS assumptions? Thank you.

Hey, Charles. This is Brian Harding. I'll cover the margin question for you. Just quickly, yeah, we expect gross margins in Q1 to be roughly the same, maybe slightly up to Q4, and then sequentially up from there through the year.

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

Please ask your question.

Yeah, I think this is a good question. James had two of them. One is if WFP is going to grow 15% to 20%, is it fair to assume you can outgrow that WFP this year? And would your revenues grow sequentially every quarter? Or is it really more back-up weighted that Q2 is going to be flattish? So just trying to figure out if you can outgrow WFP for ultra-clean revenues.

Yes, I think that what we look at is, you know, this year we see really kind of a step function growth of the WFE. So we're very confident, you know, we're well kind of in line with the WFE growth. And we also see that because we have a well-planned extra capacity that really can address $3 billion. So we'll capture more opportunities, leverage that extra capacity. So we're pretty confident we will be on par with WFE growth or even higher.

And would it be sequentially growing or is it more really like Q3, Q4?

I think that we'll see another growth in Q2 already, but more of that function in the second half.

Got it, got it. And then a quick follow-up. How much was China at the percentage of revenues last quarter, and how do you expect that to grow, especially given that the Chinese semi-cap customers seem to be doing pretty well?

It's a great question. I think that, as you have already heard from our customer, the WFE in China is sluggish in 2026. I think because of the worldwide WFE is growing substantially, I think the percentage of the China WFE will be lower. For our business, for the China OEMs, We see also kind of flattish forecast for 2026. So but overall, it's less than 7% of our overall revenue. So I would not put too much of the emphasize on this.

Thank you very much.

Your next question is from the line of Edward Young from Oppenheimer. Please ask your question.

Hi, James. Thanks for the time. Just wanted to follow up on the gross margin assumption for the upcoming first quarter 26. I think Brian mentioned that, you know, you're expecting same or slightly up from third quarter. So just wondering, you know, What's driving that? Why aren't you seeing more operating leverage from that? And can you maybe talk a little bit more in detail about the mix issue that you saw in the fourth quarter?

Yeah, I think that I will answer that, and now maybe Brian can chime in. So overall, I really see, as I said, you know, we're running at 65% of the utilization rate today. And we'll see definitely the demand is growing quarter by quarter. So by the end of the 2026, we definitely see much higher utilization rate. That will naturally expand our margin profile. And also, we're keeping very disciplined operation cadence. So we will not grow the OPAC and IDL as the revenue grow. So that will also, that discipline will also give us a margin expansion opportunities And Brian, maybe you want to talk more on the model standpoint.

Yeah, sure. Just looking at, you know, Q3 to Q4, first off, Ed, we, in Q3, we did have a favorable product mix that didn't repeat again in Q4. And so, and our margins do continue to fluctuate with volume and mix and manufacturing regions, as well as tariffs and material transportation costs. A number of things impact our margins quarter to quarter. And going forward into Q1, I did say that we expect Q4 and Q1 to be roughly in line, maybe slightly better in Q1. But then as volumes come in, as James mentioned, in Q2, 3, and 4, we expect sequential margin expansion in a meaningful way.

Okay.

And, I mean, this is a tough question to answer, but, you know, obviously a lot of excitement around what's happening in memory, and that's a business that – in the prior peak was you know 900 million dollars in revenue for you it's it's down about 300 million from that peak um so i would imagine that uh would have some significant upside as well so james when you think about i guess uh this memory cycle um you know what what are what's your feeling in terms of you know how much longer it could go in terms of the strength on the upside and You know, what are the sort of parameters we should be watching out for in terms of the slope of that up cycle and the duration of that up cycle? Thank you.

Thank you. Adam, this is a great question. The thing that you hear from our customers' customers, right, so some of them are mentioning that the shortage will last until the 2028. And we see that, you know, all three of them, Micron, Samsung, and SK, they are really investing on Greenfield. Will they continue to convert existing FAB to really kind of address immediate demand? So we really see this as a multi-year up-term for the memory segment. And also you look at the end market demand, HBM will compromise the nameplate, the capacity in the DRAM factories. So you almost need more WFE, you know, investment to compensate that focus on HBM capacity expansion while they still try to address the unbalance, the demand, the supply in the regular DRAM market. And also, I think that if you look at the land, you still see that upgrade from the 2XX to 3XX and 4XX. So that will continue. You heard Lam is talking about that $40 billion over multiple years of land upgrade capacity and investment. And they also mentioned that they are going modify that model, seeing the demand even for the ESST, for example. So I think that overall, we really believe this is a multi-year growth for the NAND. And customers are talking about for the AI-specific memory, they see a 22% CAGR or 2 to 3x of CAGR compared to the regular memory market.

That's very helpful. Thank you. Your last question comes from the line of Christian Fraub from Keg Helm.

Please ask your question.

Great. Thanks for taking my question. So, James, with the 65% utilization rate and your recent, you know, facility optimization over the last year and a half or two years, you know, how should we be thinking about what utilization rate or what type of order visibility would be required to put, in essence, the billion dollars worth of capacity that's available to you above and beyond the three billion you have today?

How should we be thinking about that?

Yeah, I think that, you know, what we see today, Kristen, is that week by week we see a drop in forecast So we're very optimistic from the run rate, quarterly run rate standpoint, we'll fill that capacity very quickly. Especially, we're actually shifting our focus to Asian manufacturing. You know, it's kind of in line with our customers' global manufacturing strategy. So very soon you will see our Asian factory will fill completely. And that will eventually represent 60% of our global capacity. It will match the customer's manufacturing footprint. So with the increasing utilization, with heavy-weighted Asian manufacturing, we'll see really the positive improvement on our margin profile.

Great. And then on the margin profile, understanding utilization rates having an impact, but as your customers then begin to, especially in memory, materially increase, you know, wafer starts per month, naturally your services business, which is heavily influenced by wafer starts, you know, similar to what we saw in 20 and 21 when that mix of revenue was larger, you know, in a 29% gross margin plus or minus naturally kind of drives gross margins there without any material increase in product gross margin.

Are you thinking about that right? Yes, you're right. Great, great.

So I think that, yeah, so I guess the question is, what is the growth on a service business? So in that sense, we see double-digit growth in 2026. Again, it's also weighted in the second half. One, our leading age foundry logic customers run top of their factories in U.S., We definitely see or will position for that U.S. Foundry logic ramp in addition to our current customer worth serving in U.S.

Great. Got it. No other questions. Thank you. Thank you. Thank you.

There are no further questions at this time. I would now like to turn the call back to James Hsiao for closing comments. Sir, please go ahead.

Thank you for joining us today. This concludes our earnings call. I will have a follow-up with you guys at a private session. Talk to you later. Ladies and gentlemen, this concludes today's conference call. Thank you very much for your participation.

You may now disconnect.