Ultra Clean Holdings, Inc.

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 0 for the operator. 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 Zhao, CEO, Sheri 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. 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. 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 2016 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 strategies, 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 reshifts the semiconductor capital equipment landscape, driving increased volume and complexity in the systems and components our customers require. As agentic 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 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. 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 investments that support their product pipeline. As AI infrastructure scales, execution speed and innovation velocity at scale will set 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 and wherever they need us. Over the past a 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 round 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 round rate of $250 billion WFE will continue to align our investment 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 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-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 enabled faster execution across our global operations. Combined with automation, advanced analytics, and AI-enabled capabilities were 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 earning 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 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, Sheri. for your many contributions on delivering 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. That 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 $62.5 million compared to $61.1 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 a low 20% range. Based on 46 million shares outstanding, earnings per share for the quarter were 70 cents on net income of $32.3 million compared to 31 cents 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 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.

Thank you. 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 touchstone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. Your first question comes from the line of Timothy Arturi from UBS. Your line is open.

Thanks a lot. 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% queue on queue in, you know, calendar Q3. I realize your product revenue outgrew their systems in June, so was it really just a timing thing, or do they have some inventory, or maybe you're just being, you know, maybe arguably a little bit conservative in your guidance?

Yeah, it's a little bit both, Tim. This is 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 Their quarter end are a little bit different from ours. So that creates a little bit of a 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 customers are so full on. 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 that maybe that can gear your revenue to the upside, just given how full their internal manufacturing is? Thanks.

Yeah, definitely we see that upside opportunity, especially when the customer are, to some extent, constrained by their internal capacity. In this up term, 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. Definitely historically we see that outgrow opportunity when the customer gave a higher percentage of their subsystem build to UCT in an upturn like this. So this is why we always see an outgrow percentage on the product side in upturn.

Got it, James. Thank you so much. Thank you.

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

Thanks for taking my question. Congrats on the nice results. 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, So what's the current judgment on the timing? Maybe you may have to do it a little bit earlier than mid-27, or what's the range of possibilities, and what's the bias? 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.

Thank you, Charles.

I think that we said we're taking the phased approach, you know, from $3 billion to $4 billion, and then from $4 billion to $5 billion. We're executed on that plan. So by the end of the year, you will see $3.5. We'll see $3.5 billion capacity ready. And that really matched the round rate we see today. And then in the first half of 2027, We will hit that $4 billion round 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 sites. So we will get that $4 billion in the first half of 27. For the $5 billion run rate, or to address that $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 timeline still, As we communicated before, in the first half of 2028, we'll 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 2028.

Thanks, James. So that's pretty clear. Sherry, congrats again on the well-deserved 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 A goal of 20% growth 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. Thank you.

Hi, Charles and Sheri. Thank you for the nice comment. I'll be answering calls on this call at this point, but you'll get to 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 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.

Your next question comes from the line of Krish Sankar from TD Cohen. Your line is open.

Hey, guys. This is Eddie for Krish. 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 like what's the driver and think about it going forward? And I have a follow-up.

Yeah, Chris, and definitely 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 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 within the WFE. So we're growing our business with our little customers. And as the EUV getting the momentum and more adoption in the leading age foundry logic and in the memory now, we'll see that we also grow our business in terms of Total revenue, but because the 2026 and 2027, we still see the WFE actually has more depth and edge intensity, so we do not see that the percentage of the non-depth and edge will grow significantly. will definitely grow in that segment as well.

Got it. And just a clarification about the previous question. You mentioned when you get to full utilization, your gross margins would be 20%. And at 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 where things are shipped from, jurisdiction, etc. So our goal is to be at $4 billion and 20% 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 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.

Your next question comes from the line of Ed 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 push-outs in the quarter?

Yeah, so the answer is no. I think we talked about that a couple of earnings ago that we really initiated the 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. But what I see is also, 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 chains. And you will see excursions in the WFE supply chain. And we just need to actively and proactively manage that.

Okay. And your comments around WFE, it sounds like, again, mid- 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 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 market. Outlook. Is it just firm customers? Is it the order book? You know, the Outlook? We love some color there.

Yeah, I think that, you know, we definitely 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, on the bouquet, right? Because I do believe that, you know, sufficient safety stock, additional capacity will become a competitive advantage in this kind of upcycle.

Perfect. Thank you.

Your next question comes from the line of Christian Schwab from Craig Helium. Your line is open.

Great. Thanks for taking my questions. Congratulations, Sheri, 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?

Christian, I definitely see that the service will grow as we communicated before in the double digits, but as you know that OEMs always have their extended service, so there's a timing lag, right? So I think that we still see the double digits growth in the 26 and 27, 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, really the kind of the leading age ramp go as they planned in factories in Korea and Taiwan.

Okay. That's fair.

Great. No other questions. Thank you, guys. Great quarter. Thank you. Thank you.

There are no further questions at this time. I will now turn the call over to James for closing remarks.

Thank you, operator. We appreciate you joining us today, and we look forward to talk some of you at the callback and update you all after Q3.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.