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

Operator: Good afternoon, ladies and gentlemen, and welcome to Ultra Clean Technology Third Quarter 2026 Earnings Call and Webcast. [Operator Instructions] This call is being recorded on Tuesday, October 27, 2026. I would now like to turn the conference over to Rhonda Bennetto, Investor Relations. Please go ahead.

Rhonda Bennetto: Thank you, operator. Good afternoon, everyone, and thank you for joining us. With me today are James Xiao, CEO; and Mike Keogh, CFO. James will start with some prepared remarks about the industry and highlight some of the opportunities ahead for UCT. Mike 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.

James Xiao: Thank you, Rhonda, and good afternoon, everyone. We appreciate you joining us for our third quarter 2026 earnings call. With me today is Mike Keogh, 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 Service 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 demands, we execute on the operational agility required to accommodate excessive orders and deliver them on time. AI demand continued to deliver strong investment across the semiconductor ecosystem, with the world's leading chip makers and equipment companies expanding capacity to support multiyear AI growth. As AI shifts from training to everyday use, it is creating demand across the entire chip stack. Leading-edge foundries are adding capacity on new nodes. Memory makers are adding clean room 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 lengths of our customers' forecast, the fab utilization and the availability of critical components across the supply chain. Today, all 3 remain healthy for us. As our business continue to scale, we are prepared to anticipate and manage the supply chain excursions. Because we've had supported 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 continue 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 built 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 clean room 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 continue to make solid progress within our growing Center of Excellence. Recently, we secured 8 new program wins across etch, 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 etch, deposition, lithography and metrology. Co-innovating earlier with our customers strengthens our position to be qualified as the first supplier and to capture more high-value content per tool. We expect this program to gain momentum as our customers advance through their technology road map and node transactions in the coming years, and our product road map 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 quote-to-fulfill, the core of our value chain. We've also launched an integrated planning platform that links demand, supply, inventory and the 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.

Michael Keogh: 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 joined UCT because I see compelling growth opportunity as the semiconductor industry enters what we believe are the early stages of a multiyear 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 $0.45 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 2 largest customers contributed 61% of total revenue. Products revenue was $681.9 million, up 19.1% sequentially. The increase in sales was primarily -- 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 node 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 starts. 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 starts to 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 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%, up 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 up cycle, we have been building inventory, including preordering 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. 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 road maps. 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 million 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 shares. 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 this cycle demands. And with that, operator, please open the call for questions.

Operator: [Operator Instructions] And your first question comes from the line of Timothy Arcuri with UBS.

Timothy Arcuri: So James, you're expanding a lot, obviously, to support this ramp. And you're also investing lots of money. Mike, you talked about investing another $80 million to $100 million. 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?

James Xiao: Thank you. Great question, Tim. I think that as you see that the whole industry is really looking for a long-term agreement starting from our customers' customer. And so our customer also look at the supply chain resilience they mentioned in their 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 demand are really kind of openly discussed, and that the future capacity we're going to add are going to be fully utilized by our key customers.

Timothy Arcuri: Yes. 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 -- like, 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?

James Xiao: So just a small correction, Tim. So if you do really kind of proportional ratio our revenue to the WFE, so our $5 billion run 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 gave 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 with that.

Operator: And your next question comes from the line of Charles Shi with Needham.

Yu Shi: 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 come across as a surprise, at least to me. Like, I would have think supply chain excursion, like you said, it will happen, but maybe not to the degree this early. But where exactly you see are the potential supply chain excursions right now? And specifically, there have been good amount of chatters about mass flow controller, MFC, shortage. And how are you navigating through this? Just from your numbers -- your reported 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.

James Xiao: Thank you. I think that this was broadly discussed in our industry at this moment. As I mentioned, Charles, before, when you see the industry grow at more than 10% quarter-to-quarter growth rate, the supply chain will continue to face increasing pressure. So excursion will happen. And it did happen. I think that as Mike mentioned, we actually really kind of proactively position ourselves by always having excessive capacity 1 to 2 quarters ahead of the demand forecast we see. And we also build safety stock to really kind of address the supply chain excursions. So that operation agility and supply chain resilience help us to manage this excursion better. One thing I can tell you is that we do not miss a single module of subsystems that are needed for our customers' quarter. And we also really kind of exceed our forecast by really handle the drop in demand that customers pushed to us during the last 2 quarters. So that should tell how well we manage this supply chain excursion, and we'll continue to do so.

Yu Shi: Maybe a follow-up that actually still go 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 I kind of imagine that the conversation dialogue with the suppliers may be more candid. But what's the latest that what you hear from them when they think the supply can be more in balance, more and more matching demand when the supply catches on to the very, very rapidly growing demand for MFC?

James Xiao: Yes. I think that the MFC constraints may continue for a quarter or 2. But we definitely see that at the end of day, the industry will address that challenge collectively and closely communication with our customers and also with our suppliers will help us to smoothen that challenge. And really, the collaboration and the partnership matter the most at this moment.

Operator: And your next question comes from the line of Krish Sankar with TD Cowen.

Robert Mertens: 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 shortage side. But maybe going along with that, if you could just expand a bit on what areas you're co-innovating with customers, where you think the customized approach adds the most value? And sort of how do you weigh those opportunities against expanding your manufacturing capacity and flexibility, being able to actually ship what the customers want in addition to making sure that you have a long runway with the product road map?

James Xiao: Great question. I think that we'll definitely do both, right? So the 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 increased quarter-by-quarter right now, and we're doing well on that. So in terms of the NPI engagement with our customers, so we did launch the Center of Excellence, NPI in Hillsboro, leveraging our acquired company called HIS. 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 the announcement, we were able to really successfully engage on 8 NPI programs with customers spread over different product lines at the customer side. What it does is really fully aligned with customers' future product road map. We will see those products most likely get productized on the next node NPI the customer is going to commercialize in the next 2 to 3 years. And we'll have a meaningful margin expansion and share gain when we have that into the high-volume 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 to build-to-spec. That will further improve our stickiness and technology collaboration with our customers and improve our share and margin.

Operator: And your next question comes from the line of Edward Yang with Oppenheimer.

Edward Yang: 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.

Michael Keogh: Yes. 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?

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

Michael Keogh: Yes. So right now, we're not seeing that. As James mentioned earlier, we did not -- we were not gated by anything last quarter. We didn't miss a shipment. 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 with our -- as we're seeing increasing revenue, we have been buying ahead and ensure that we have our strategic supply met. 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 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 ship.

Edward Yang: Okay. And my follow-up question's 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?

James Xiao: Ed, as you know that we actually have all the major WFE customers as our existing customers. So we are familiar with the optical inspection systems 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 we customer for the optical inspection and metrology.

Operator: And your next question comes from the line of Christian Schwab with Craig-Hallum.

Benjamin Taxdahl: This is Ben Taxdahl on for Christian. A lot of my questions have been answered, but I got one left for you. And this call, very positive commentary in last call, this call almost maybe even seems more positive compared to last call. So I guess, are you guys thinking about it like that as well in the environment going forward? And then kind of tying to that, specifically, what has the conversations been like with customers kind of over this last quarter and how have 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 a bit?

James Xiao: Yes. I think that the sentiment does not change that much. I think it's just that we execute pretty well. And maybe that makes a little bit difference, right, in terms of the results and the outlook. And the customer side, I think that -- you 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 is more solid. Probably one thing we can say now. And the second thing is that we start to hear from -- you can also hear from their earnings call that '28 is more or less booked as well. So you see different numbers. But what I see is really what the analyst community are spelling out the $250 billion WFE and above. I don't hear any of the customer gave that number yet.

Benjamin Taxdahl: So yes, you're not hearing customers, but that '28 is coming to life a little bit more.

James Xiao: And also, I think that you also hear the news that there's a new factory announcement like TSMC's Dallas fab and the Terafab. It's become more concrete.

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

James Xiao: Well, that concludes our Q3 '26 earnings call. Thank you all for joining us, and we'll see you all in the next quarter.

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