Ultra Clean Holdings, Inc. Aktie

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.

Thank you, operator. Good afternoon, everyone, and thank you for joining us. With me today are James Xiao, CEO; Sheri Savage, 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.

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 the 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 expect 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 time lines, delivery schedules and ramp readiness. Long-term customer forecast 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 the 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.

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 Instructions] Our first question comes from the line of Charles Shi from 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.

Thanks, Charles. Yes, so the WFE outlook is really continue to grow bigger than we saw the previous quarter. We see really from our customers, 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 the similar momentum. The customers are talking about 15% and above for the 2027.

So to your question about the memory growth, I think that we kind of see that the AI capacity is somehow gated by the memory capacity in the past 3, 4 quarters. And 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. So that actually gave a whole industry an unlock of the constrained capacity. So we see more of the new leading-edge new factory launches in basically all 3 leading customers, TSMC, Intel and Samsung.

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 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?

Yes. I think that, first of all, very good question. If you see the -- really the fast-growing segment in WFE overall, it is really the leading-edge foundry logic and HBM on the memory side and advanced packaging. So those are more an etch and removal intensive in terms of capital intensity. So therefore, relatively, you hear our customers are saying that they see that the first half, the deposition and etch is at mid-30s of the WFE. And in the second half, they see that increase to the high 30s of WFE.

So naturally, because this high-growth area are etch and dep intensive, so we see a higher share of dep and etch in overall WFE. The flattish area we see is probably the non-dep and etch segment overall. And the surprising is the trailing node foundry logic are also not going down. They're more like flattish. China, as we discussed before, it was a kind of building inventory safety stock situation in '24 and '25. Therefore, they're really kind of become a bigger portion of worldwide WFE at 35 to 40. Now we're seeing they're back to normal in the low 20s as the portion of the worldwide WFE. So I don't think that's an outlier. It's more back to the normal business situation.

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 -- I mean this year is 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 are coming from your customers are reasonable, whether -- or if any chance some of the requests you would see unreasonable and potentially at the expense of the growth for your outer years? How do you handle the situation like that and in terms of how you allocate your capacity, grow your capacity, et cetera? Just maybe a little bit of high-level philosophical question from -- I want to understand how you operate in an environment like this.

Actually, this is a great question. I think that I really see a very healthy move as an industry. What I mean by that is that we see the customer actually giving us a long-term forecast, so we can do the planning better. And the long-term forecast is actually showing the growth momentum. They gave us a confidence to really kind of utilize our current capacity and also have the confidence to plan for the next step expansion.

As I mentioned in my previous earnings call and this one, we really have capacity to really run at $3 billion run rate per year. The current run rate is still $2 billion, $2.2 billion. So we have the runway to really kind of address additional demand. And our brick-and-mortar capacity can handle up to $4 billion. So by minimal capital investment, we can have 6 to 9 months to build that capacity so we can really reach the $4 billion run rate. So in that sense, we're well positioned to address the drop-in demand from our customers.

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

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

Our next question is from Christian Schwab from 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 do you -- 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?

Yes, great question. So we -- as you can see that 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 and for the second half.

Perfect. And then can you give us -- given $4 billion in revenue driven by increased WFE, but 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 service?

Yes, I think it's a good question. So as we discussed, we see that the -- our service revenue is really a function of wafer starts and a small portion of that business is also directly correlated to the WFE growth. So in an aggregated base, we expect a double-digit growth for the year on the service side. And going forward, we still see a range of 10% to 12% as our overall revenue percentage.

Great. And then lastly, historically, if we go back to '20 and '21 as far as the last accelerated WFE spending cycle, you outgrew WFE growth materially. And should we assume the big not only market share gains and certainly your ability to potentially gain share with the ease of adding increased capacity. But as far as outgrowing WFE, there's a lag period between installing fab equipment and wafer starts being finished, which is the driver of the services business, I guess, in aggregate. Is that the way we should be thinking about the primary driver of your growth outperforming WFE? Or do you think this cycle, you're better positioned for market share gains?

Yes. So we definitely see that we will grow with the WFE growth and with really the upside potential on both product side and service side. And really, to me, the playbook is always to defend the core, which we are really in a leading position and grow the SAM. So we enter into new modules and new gas panel business as our customers expand their product portfolio. And then finally, win at inflection. So position ourselves with stronger NPI capabilities so we can align with customers' NPI road map and win in the next node inflection.

Our next question is from Edward Yang from 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?

Yes. Gross margin should start to continue to improve as we move through the year. Obviously, we'll see it being slightly up in Q2 and then continue to grow as we move through the year as the revenue potentially goes up. So obviously, mix and where it's shipping from does play a factor in that and things change as we move through the year, but we truly do see it moving up as we get closer to the Q4 time frame.

And Sheri, if I could dig a little deeper related to mix. I mean you've got a plethora of different products and services. Just focusing on the product side, what are the gross margin differentials between your lowest and highest? And what's your highest margin products and maybe talk some detail around that.

Yes. We probably don't publish as much on the specific product margins. But as I've mentioned before, we have a large bell curve of margins, so they can range anywhere between 10% to 50% to 60% depending upon whether it's a component part or it's a module or a gas panel.

So it just really depends on the sheer volume of each of those mixes of products that play into our overall gross margin, along with how fast the revenue comes in to us and how fast we can hire labor and other costs associated with that. So those are the key factors that play into our margin as we grow revenue. So again, a large bell curve of margins. There's quite a few different products and different margins within those products as well. So that's why it makes it complicated to detail all of those out.

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 just interested in the progress around that, the co-innovator and the MPX framework. And just wondering how customer receptivity has been to that? And when can we expect to see specific market share gains or new module wins around that MPX framework?

We are -- great question. We are investing in our, I call it, regionalized center of excellence. So basically, we have NPI Center of Excellence in U.S. We further enhance that. And we're actually expanding our NPI capabilities in Asia and also in Europe. So the customer wants to have the engineers co-innovate, define the spec and really design the system and modules close to their core engineering team.

That's actually in Europe, in U.S. and expanding to Asia. So we follow customers' need on that. Then we will also transfer that locally by region to our HVM site, also distribute in all the regions, right, U.S. and Europe and Southeast Asia. And that's really well aligned with our customer strategy where they're also moving their global engineering footprint close to their high-value production sites. So well received by customer. We see some early momentum, and that's actually accelerating our NPI engagement with customers. We already have a pretty strong pipeline of NPI engagement with existing customers. This regionalized center of excellence just further enhance our capabilities.

Our next question is from Krish Sankar from TD Cowen.

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

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

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.

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

Good afternoon, ladies and gentlemen, and welcome to the Ultra Clean Technologies Fourth Quarter 2025 Financial Results Conference Call. [Operator Instructions] This call is being recorded in Monday, February 23, 2026.

I would now like to turn the conference over to Ronda Bennetto, Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, everyone, and thank you for joining us. With me today are James Xiao, CEO, Sheri Savage, 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.

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 sold earnings call as CEO. And as I approach nearly 6 months in a row, I remain very energized by the opportunity ahead of us. We will spend significant time across our global sites, meeting with employees, customers and partners, and have developed an even deeper connection in the strength 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 designing advantages for long-term winners at UCP. 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 wafer fab 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 market could reach $1 trillion in annual revenue of semiconductors by 2027, possibly earlier, which is significantly ahead of prior expectations. What we are with anything is not a normal cyclical upturn. It is an AI technology inflection. The center of gravity has shift from consumer electronics to AI infrastructure, visit AI, autonomous driving and other AI applications. The evolving AI road map from generative AI to physical and genic AI and ultimately, artificial general intelligence, or AI is 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 ad fabs deploy new materials like molder, and new structures such as gate our round and high-bandwidth memory. These technologies require tight integrated solutions across deposition and removal, with increased DAP edge CapEx intensity, which provide a tremendous growth opportunity for UCT. All these market drivers should lead to a multiyear WFE outturn once wafer fabs address their near-term cleanroom constraints. Our technology co-innovation is tightly aligned to our customers' road maps.

We expect to see strength around edge and deposition, especially ALD and high-precision patch to support gate our run and backside power distribution and 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 sensible urgency, efficiency and accuracy. Leveraging our global talent and the 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 optimization 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 constraints to ensure the readiness for a step 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 scaled workforce required and leverage automation and the leading 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 road maps while capturing in and dropping opportunities and responding rapidly to urgent need and frequent changes that others may struggle to support. In addition to our 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 MPS strategy which is comprised of new product introduction, new product development and new product transition.

Together, they will position UCT to 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, shorter cycle times, enhancing productivity and enabling a faster response time to our customers. These digital initiatives set a solid foundation for our multiyear 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 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 Sheri 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 to -- 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. We 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 increased 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% and 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 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 $0.22 and on net income of $10 million compared to $0.28 on net income of $12.9 million in the prior quarter. For the full year, earnings per share was $1.05, and 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 $55.6 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 $0.18 to $0.34. And with that, I'd like to turn the call over to operator for questions.

[Operator Instructions] Ladies and gentlemen, we will now begin the question-and-answer portion of the call. [Operator Instructions] Your first question comes from the line of Charles Shi from Needham

I want to start with your overall on WFE. Back in January, I believe you talked about probably low to mid-teens WFE growth I saw your presentation there's $125 billion to $135 billion projection in the deck, but 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 a 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 -- I mean implying a very, very strong second half pickup. I wonder how the shape of the year could be.

Charles, let me answer your questions, and we'll have Sheri came in. So for -- that's why I explained to you in the Medan conference, a month ago, we see the forecast increase week by week. So right now, our view on the overall 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?

James, maybe a quick clarification. Just a 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 from a strong pickup again from September to December. Is that what you were speaking to? Yes.

Yes, I think that you're right. So look forward, we devise a step function increase in the second half of '26 and that's where we see the over year and we're very optimistic about the whole year growth.

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

Charles, this is Brian Harding, I'll cover the margin question for you. Just quickly, yes, 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.

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

GMs 2 of them. One is if WP is going to grow 15% to 20%, is it fair to assume you could outgrow that WFE this year and would your revenues grow sequentially every quarter? Or is it really more back operated that Q2 is going to be flattish. So just trying to figure out if you can outgrow WFE for Ultra Clean revenues.

Yes. I think that what we look at is this year, we see really kind of step function growth of the WFE. So we're very confident we will 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 will see another growth in Q2 already but more step function in the second half.

Got it. Got it. And then a quick follow-up. How much is China as a percentage of revenues last quarter? And how do you expect that to grow, especially given that Chinese semi cap customer seems to be doing pretty well. It's a great question. I think that as you have already heard from our customers, the WFE in China is flattish in 2026. .

I think because of the worldwide WP 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. But overall, it's less than 7% of our overall revenue. I would not put too much of emphasis on this.

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

James, just wanted to follow up on the gross margin assumption for the upcoming first quarter '26. I think Brian mentioned that you're expecting same or slightly up from third quarter. So just wondering 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?

Yes, I think that I will answer that, and maybe Brian can chime in. So overall, I really see as I said, we're running at 65% of the utilization rate today and we'll see duly the demand is growing quarter-by-quarter. So by the end of 2026, we definitely see a 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 OPEC and IDL as the revenue growth. So that will also -- that discipline will also give us margin expansion opportunities -- and Brian, maybe you want to talk more on the model standpoint. .

6 Yes, sure. Just looking at 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 obviously, a lot of excitement around what's happening in memory, and that's a business that in the prior peak was $900 million in revenue for you. It's down about $300 million from that peak. So I would imagine that would have some significant upside as well. So James, when you think about, I guess, this memory cycle, what are -- what's your feeling in terms of how much longer it could go in terms of the strength on the upside? And 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. A, this is a great question. I think that you hear from our customers' customer, right? So some are mentioning that the shortage will last until 2028. And when we see that the -- all 3 of them Miron Samsung, 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 multiyear upturn for the memory segment. And also if you look at the end market demand, HBM will compromise the nameplate capacity in the DRAM factories.

So you almost need more WPE investment to compensate that focus on HVM capacity expansion, will we still try to address the unbalanced demand and supply in the regular DRAM market. And also, I think that if you look at the NAND, you still see that upgrade from the FXX to 3x and for X. So that will continue -- you heard Lam is talking about that $40 billion over multiple years of net upgrade capacity and investment and they also mentioned that they're going to modify that model. seeing the demand even for the SSD broadband, right?

So I think that overall, we really believe this is a multiyear growth for the NAND customers are talking about for the AI specific memory this year, 22% CAGR or 2 to 3x CAGR compared to the regular memory market.

Your last question comes from the line of Christian Far from Craig-Hallum.

So James, with the 65% utilization rate in your recent facility optimization over the last 1.5 years or 2 years, how should we be thinking about what utilization rate for what type of order visibility would be required to put in essence, the $1 billion worth of capacity that's available to you above and beyond the $3 billion you have today? How should we be thinking about that? .

Yes. I think that what we see today, Christian, is that week by week, we see a drop in forecast. So we're very optimistic from the run rate quarterly run rate standpoint will fill that capacity very quickly, especially we're actually shifting our focus to Asian manufacturing is 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, well matched the customers' manufacturing footprint. So with the increase in utilization with highly 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 wafer starts per month, naturally, your services business, which is heavily influenced by wafer starts similar to what we saw in '20 and '21 when that mix of revenue was larger 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?

Right. Great. So I think that -- yes, so I guess the question is what is the growth on the service business? So in that sense, we see double-digit growth in 2026. Again, it's also weighted in the second half on our leading a foundry logic customers ramp up their factories in U.S. The RSC, we're well positioned for that U.S. foundry logic ramp in addition to our current customer or serving in U.S.

Thank you. There are no further questions at this time. I would now like to turn the call back to James Shaw 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.

Ladies and gentlemen, and welcome to UCT Q3 2025 Financial Results Conference Call. [Operator Instructions] Please be advised that this call is being recorded on Tuesday, October 28, 2025. I will now turn the call over to our first speaker today, Rhonda Bennetto, Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, everyone, and thank you for joining us. With me today are Clarence Granger, Chairman; James Xiao, CEO; Sheri Savage, CFO; and Cheryl Knepfler, VP Marketing. Clarence will begin with some prepared remarks about the quarter, and James will share his thoughts on the industry and the opportunities ahead for UCT. Sheri will follow with a 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 would like to turn the call over to Clarence. Clarence?

Thank you, Rhonda, and good afternoon, everyone. We appreciate you joining our third quarter 2025 conference call. I'll start with a brief review of our Q3 results, followed by an update on our 3 areas of focus, including new product introduction, flattening the organization and business structure and processes.

After that, I'll turn the call over to James Xiao, UCT's new CEO, for a few observations from his first 60 days and insight into UCT's next phase of growth. And then Sheri will provide a more detailed financial review. First of all, we are very pleased with our third quarter results, which reflect continued progress on the priorities we've set for the year.

This quarter, we realized a notable improvement in our gross margin, demonstrating some early benefits of the structural and operational improvements we've been implementing across UCT as well as some tariff-related cost recovery. These results speak to the resilience of our business model, the discipline of our global teams and our continued focus on execution in a complex and uncertain business environment.

Throughout the quarter, we remain focused on strengthening our operational foundation through the 3 key initiatives I highlighted last quarter. First, we continue to drive new product introductions and component qualifications with our customers, ensuring we are positioned early in their technology development cycle.

Second, we substantially completed the work to flatten our organizational structure. A key milestone that's improving our decision-making speed, increasing efficiency and better connecting our global teams. Part of this process includes driving factory-level efficiencies and consolidating select sites to further enhance productivity and optimize our cost structure.

A third major area of focus, streamlining our business systems and the optimization of our prior acquisitions, including Fluid Solutions, Services and HIS into UCT's core systems and processes is on track. We installed our company-wide SAP business system into our Fluid Solutions Group at the beginning of July, and we have completed the strategic alignment between our Products Group and Fluid Solutions on qualification priorities with our customers.

This alignment strengthens our position for new business opportunities and will support improved margins over time. These combined efforts represent a comprehensive transformation that positions UCT for greater agility, efficiency and long-term profitability. While it will take time for all the benefits to be fully realized, these actions are foundational to building a stronger and more competitive company for the years ahead.

We all recognize that the current macro landscape remains dynamic with near-term volatility and reduced visibility. Yet the underlying fundamentals of our industry remain exceptionally strong. AI-enabled high-performance computing continues to drive a powerful new wave of semiconductor innovation, fueling demand for advanced manufacturing technologies, new architectures and next-generation processes. These structural growth drivers play directly into UCT's strength, our deep technical expertise, our manufacturing expertise and the ability to respond with speed and precision as our customers' needs evolve.

With that, I'll turn the call over to James to share more about our operational progress, customer engagement and the opportunities we see ahead. James?

Thank you, Clarence. My first [ 60 ] days as CEO has been inspiring. The talent and their drive across UCT give me full confidence in our ability to take the company to the next level. Our industry is entering a new era fueled by AI and rapid technology change. That is what I call UCT 3.0, evolving from a trusted partner into a trusted strategic partner and co-innovator deeply integrated into our customers' technology road maps. By harnessing our operation agility and innovation velocity, we will unlock new levels of growth with our world-class facilities while supporting our global customers with speed, scale, automated infrastructure and innovation.

To build a little more on what Clarence already highlighted, my immediate focus remains on strengthening the profitability, optimizing our global footprint and positioning UCT for long-term growth. Operationally, we are driving measurable improvement in quality, cost efficiency and on-time delivery performance.

Through lean and quality initiatives, we are streamlining our process across sites and sharing best practices, including broadening our vertical integration and optimizing the organization and our accountability. Automation and digitalization, including the integration of AI-based inspection and robotics are also accelerating factory throughput and quality consistency.

With that, UCT will have more robust infrastructure and processes to better capture emerging growth opportunities during the next ramp. Our optimized footprint strategy ensures the capacity is aligned with regional wafer fab equipment demand growth. We are establishing a cluster-based manufacturing network to improve global innovation, speed and cost efficiency through regionalized centers of excellence with new product engineering and mass production transfer.

To build long-term value creation, we will accelerate the design to production cycle, capitalize on high-value new product introduction at a leading-edge node and further strengthening our strategic partnerships with semi-cap customers through technology integration and execution discipline. We are aligned with our peers, customers and industry sentiment that the long-term outlook for the semiconductor market is very much intact.

We see powerful sustained demand driven by AI, high-performance computing, data center expansion and advanced packaging technologies. We view these structural technology inflections as the foundation for a decade of growth across the semiconductor ecosystem. In the short term, while downstream fundamentals and sentiments are improving, it could take several quarters to see a meaningful acceleration in wafer fab equipment spending. This does not change the fact that I'm very excited about UCT's future and the opportunity to lead this company into the next AI era of semiconductor advancement. Back over to you, Clarence. Thank you.

Thanks, James. I know that with your leadership, UCT will be in good hands. Since this is my last conference call, I wanted to thank all our investors, our customers and especially our employees for the trust they placed in me during this transition period. It was my honor to step in and reconnect with everyone, and I am very confident that James will take us to the next level. With that, I'll turn the call over to Sheri for a review of our financial performance. Sheri?

Thanks, Clarence and James, and good afternoon, everyone. Thanks for joining us. In today's discussion, I will be referring to non-GAAP numbers only. As Clarence and James noted, our third quarter results highlight meaningful progress on our key initiatives for the year. These achievements demonstrate the effectiveness of our strategy and the resilience of our organization as we continue to position UCT for long-term profitable growth. For the third quarter, total revenue came in at $510 million compared to $518.8 million in the prior quarter.

Revenue from products was $445 million compared to $454.9 million last quarter. Services revenue came in at $65 million in Q3 compared to $63.9 million in Q2. Total gross margin for the third quarter was 17% compared to 16.3% last quarter. Products gross margin was 15.1% compared to 14.4% in Q2 and services was 30% compared to 29.9% last quarter. Gross margin gains were supported by improved site utilization, a higher value product mix, cost and efficiency initiatives and tariff recoveries.

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. Operating expense for the quarter was $57.7 million compared with $56.1 million in Q2. As a percentage of revenue, operating expenses were 11.3% versus 10.8% last quarter. As mentioned in the previous call, this increase in OpEx was mainly due to incremental SAP go-live costs.

Total operating margin for the quarter came in at 5.7% compared to 5.5% last quarter. Margin from our Products division was 4.9% compared to 4.8% and services margin was 11.1% compared to 10.5% in the prior quarter. Our third quarter tax rate came in at 22.7% as we have revised our full year estimated tax rate to approximately 21%. Our mix of earnings between higher and lower tax jurisdictions can cause our rate to fluctuate throughout the year.

For 2025, we continue to expect the tax rate to be in the low to mid-20s. Based on 45.6 million shares outstanding, earnings per share for the quarter were $0.28 on net income of $12.9 million compared to $0.27 on net income of $12.1 million in the prior quarter.

Turning to the balance sheet. Our cash and cash equivalents were $314.1 million compared to $327.4 million at the end of last quarter. Cash flow from operations was breakeven compared to $29.2 million last quarter, mainly due to timing of cash collections and payments. Reducing our overall interest expense remains a key priority.

During the quarter, we took advantage of favorable conditions in the credit markets to reprice our Term B loan, lowering our interest rate margin by 50 basis points. This proactive step further optimizes our capital structure and reduces our long-term borrowing costs. Another development includes the renewal of our share repurchase program for an additional 3-year term, authorizing up to $150 million of repurchases with a maximum of $50 million per year. Although we are not anticipating near-term repurchases, we view this program as a valuable component of our disciplined capital allocation framework.

The tariff environment for the semiconductor market remains dynamic, and we continue to see the effects across the supply chain. During the third quarter, we achieved some tariff recovery, and we will continue to closely monitor developments, leverage our global footprint and localized supply chain to help mitigate the impact, maximize efficiency and protect our profitability. As stated earlier, this quarter was very favorable for product mix and factory utilization.

We see Q4 returning to similar levels as the first half of the year. As a result, we project total revenue for the fourth quarter of 2025 to be between $480 million and $530 million. We expect EPS in the range of $0.11 to $0.31. And with that, I'd like to turn the call over to the operator for questions.

[Operator Instructions] Your first question comes from Charles Shi of Needham & Company.

Maybe the first question on the near-term industry demand outlook. It sounds -- it looks like you guys are seeing maybe we won't really see a pickup over the next several quarters before an actual pickup start to happen. And I wonder what your view right now on first half next year? Should we still kind of assume that the $500 million per quarter level? And what's the early view on the second half next year? That's the first question.

Yes. Okay. So Charles, thanks for the question. And I look forward to work with you and your firm as a long-term partner. I think that our view on this, as you already heard from some of our customers, right? They really see a kind of mid- to high range of year-over-year growth in next year's WFE in general.

I think that some customers see that a little bit of a flattish outlook in first half, and they see a kind of step function increase in the second half. Others see differently. So I think that I really do not want to give you a specific because the controversial outlook we have from different customers. So I would say that we will see a mid- to high range and year-over-year growth and the timing of that to be seen. Charles, you want [indiscernible].

Go ahead, Charles.

Yes. Maybe a second question on Q4. It looks like you're guiding Q4 slightly below the September level. I believe one quarter ago, you were expecting some pickup tied to some of the opportunities you saw in Europe. And I wonder why the guide is a little bit lighter than the expectation a quarter ago. Was that the timing of that program in Europe or something else has probably weakened a little bit?

Charles, this is Sheri. Yes, we did -- we have seen that demand and continuing to see that, but we are seeing some different forecast from other customers. So it's just causing a little bit difference in Q4 than what we initially said last quarter. But we are seeing strength in that specific revenue that we talked about in Q3.

As you know, we have a large bell curve of margins that we produce for our customers. And in Q3, just happened to be a little bit better mix than what we've seen previously. And Q4 is kind of going back to the mix that we've seen in the first half of '25. But that's generally why our Q4 is slightly down from the Q3 time frame.

But Charles, this is Clarence. So as we said, we were going to capture some new business in Europe in Q4. We did capture that business. It's just, as Sheri said, some other businesses slowing down and offsetting that. But overall, we are very confident in our position in capturing new business, and we feel we're well on our way to have a much stronger year in 2026, albeit maybe in the second half.

Got it. If I may, I have one last question. what's the -- is there anything changed -- anything that's different in terms of your view about your China for China business? We knew that at the beginning of the year, there was some technical challenges that your Chinese OEM customers saw and that kind of led to quite a bit of a decline in that part of the business. Is that on track to recover? And is it on track into the, let's say, into the fourth quarter, where do you see that China for China business in terms of maybe revenue run rate where it's going to be at?

Charles, yes, we knew this question was coming from you. We were kind of flipping a coin to see who got to answer it. I got the short straw. So I guess it's my turn. So just to make sure we clarify on our China situation. Literally, a little less than 7% of our total revenue is to our Chinese customers. So it's not a huge portion of our revenue.

But obviously, I understand why everybody is interested in China with all the talk going on. So -- but in terms of the revenue, our revenue this quarter and next quarter will be about the same percentage for China. So it's relatively flat right now. And frankly, because of all the political turmoil, we are migrating all of our non-Chinese customer manufacturing out of China.

So as you know, we've called that China for China, but we're probably going to quit using that terminology. But essentially, all of the products manufactured in China as of the end of the fourth quarter will be manufactured in China and all of the products for our non-Chinese customers will be manufactured outside of China. So that's an important strategic direction for us, and we've accomplished what we said we would.

So from a long time -- long-term perspective, we're very comfortable with our position in China. We think the Chinese market is going to be one of significant growth over the next few years, and we fully intend to participate in that market going forward, albeit on a slightly different footing where we have essentially 2 separate manufacturing organizations.

Your next question comes from Krish Sankar of TD.

This is Robert Mertens on the line on behalf of Krish. First, congrats, James, on the new role. We look forward to working closely with you in the future. Just my first question, could you walk us through some of the remaining synergies with these recent acquisitions you've done?

I believe last quarter, maybe you had mentioned integrating the Fluid Solutions Group systems into existing products. Are those targets still on track? And then I have one follow-up.

Sure. So yes. So obviously, we've talked about the acquisitions. We had Fluid Solutions, Services and HIS. And so the Fluid Solutions is the one where we've made the most significant progress right away. We have completed the inclusion or update to the SAP business system in our Fluid Solutions site. This will -- this will give us consistency between our traditional UCT manufacturing and our Fluid Solutions. We've also completed the strategic alignment between the Products group and the Fluid Solutions on qualification priorities with our customers. So we've made very good progress there.

What that means, though, is the reason we need strategic alignment is the Fluid Solutions products will be utilized in the subsystems that our product systems that our products groups build. So we won't actually see -- as Fluid Solutions gets more and more qualified, we won't actually see an increase in revenue. What we'll see is an increase in margins because the Fluid Solutions products will be replacing other products that we've had to buy from other suppliers.

And so that will result in improved margins for us. And so we're very pleased with the progress that we've made there. The other 2 sites are the services side, and we've made some good progress on the integration of the services side. We had previously had the business unit separated from the manufacturing arm of the services group, and we've now combined that to improve our overall efficiencies. That's been accomplished.

And the HIS group, we are considering various options relative to locations and possible levels of increased utilization for new product introduction and possible site consolidation. So we have not finalized all the activities that we're doing in those major areas, but we do think that we've made significant progress, and we expect significantly more progress in 2026.

Great. That's helpful. And then just for the tariff recovery benefit in the quarter, was that meaningful to the overall margin growth in the September quarter? And was this sort of a onetime benefit catch-up from suppliers? Or should we expect a bit of a tailwind in the December quarter as well?

Yes. Well -- this is Sheri, Robert. We will continue to collect surrounding our tariffs going forward. We did collect slightly more than what we anticipated in the original forecast. So that did help with our overall EPS. But we anticipate -- we have put a really good process in place and for go forward now, and that basically will assist us with that collection as we move forward.

I guess the other point I'd like to make on that, we're now to the point where we're very -- first of all, this was not a onetime hit. This is ongoing. But we are very confident that we are now to the point where we are able to recover approximately maybe a little over 90% of the tariffs that we get charged. So this should be less of a factor to us on a go-forward basis.

The next question comes from Christian Schwab of Craig-Hallum Capital.

Congrats, James, on the new role. As far as WFE outlook for calendar 2026, I understand you're seeing conflicting data points and third-party research is kind of all over the place as well. But that being said, do you think the company is positioned to outgrow WFE growth in calendar '26 regardless of what that number is?

Historically, kind of in an upturn, you've kind of done 10% or more growth on top of WFE. Is that what we should expect? Or would you expect the business to kind of follow whatever WFE looks like?

Christian, this is James. Nice to meet you virtually. So I think that, as I mentioned, the 26% is really a kind of 5% to 8% of year-over-year growth, depending on which analyst you're looking at. And from the UCT perspective, it's hard for us really to give you a concrete forecast on how much is our year-over-year growth. For the following reasons because number one is that we still see some of the customers still have inventory. So the consumption of inventory actually kind of delay the revenue from UCT perspective, right? So we're not synchronized because of that, number one.

Number two is also, if you look at the NPI cycle of our customers, it takes quite a long time for them to really ramp up their NPIs and really kind of qualify UCT, especially for the NPI products. So therefore, you probably see them to have this incremental revenue while the UCT revenue growth from the NPI product will be a few quarters behind. So therefore, we cannot fully capture the NPI growth. But -- and then the third is really the product mix.

If you look at the leading-edge spending, right, you can see that the litho is more than 40% of the spending. UCT historically is really edge and that intensive. But with that said, we're working very closely with our third customer, which is a litho company and grow our revenue with them. So I think that longer term, you will see that we're more kind of matching the double-digit growth when we grow that litho business.

And finally, I think that this also goes to the China factor, right? So I think the domestic OEMs in China depending on the analyst report, you kind of follow, there could be an increasing percentage of the worldwide WFE growth. And [indiscernible] not necessarily have the same market share as we have the rest of the world. With all that factors, I cannot give you the exact number, but we're pretty confident we will outgrow the WFE.

Your last question comes from Edward Yang of Oppenheimer.

Welcome aboard, James. Can we just close the loop on your comments about reduced visibility? It just seems a bit discordant from the rest of the industry so far, where I think the tone seems to be a bit more positive. So what are you seeing specifically in your order book? Just want to better understand the offsets. Is it China? Is it memory? I saw that your memory revenue was down. Or is it specific customers that give you some caution?

Ed, this is Cheryl. I'll start sort of with the industry view and then let James talk a little bit more in terms of some of the products. So when we look at the industry, we do have a number of the companies and third parties who are indicating second half should be positive. There's a lot of things that are going in on that. But we also have some of our large growth customers who are indicating some level of concern, whether it translates to them saying their revenue is looking to be flat or others.

So there are at least 2 of our customers who are looking at flat revenue, flat to up, others who are still forecasting significant gains opportunities, but all on the second half. So -- and we've had 2 or 3 or 4 years of saying second half growth. So I think we are just looking at remaining prudent in how we're looking at things since we are getting some level of conflicting information. However, I do think we have a lot of programs going on that James will reference that indicate that we do expect to see a level of growth through that, but we just want to remain cautious about how we're looking at it and how we structure things.

Well said, Cheryl, I think that the only thing I want to add is that it's really the business nature. I leave in both words at semi-cap OEMs and now with a subsystem company like UCT. I see the visibility is a little bit different. The other side is about 6 to 9 months, if you will. Here, it's really a quarter plus, I'd say. So therefore, there is a visibility kind of difference. Therefore, I think we want to stay very, very precise on what we know and what we can really kind of share with you and the rest.

Okay. That's helpful. And James, I mean, you spoke a lot about efficiency and optimization, but I would love to get your thoughts also on your plans for restarting the growth engine at UCT. Where do you think the best opportunities are? Is it in leading edge, AI? Is it M&A, China? Would love to get your thoughts there.

I think that those are all relevant. I would love to do all of them, but I think that we're also constrained by the resource, and I want the team really focused on the fundamental first, right? So as a subsystem partners to our OEM customers, we want to make sure we really deliver on time. We really have the least quality excursion. And also, we continue to drive the cost efficiency, right? So that's really my first priority. Then I think that the growth really -- it's always follow that Horizon 1, 2, 3 cadence. I always want to focus on Horizon 1, which is really expand the business with our partners in the OEM space. The top 3 customers is definitely our focus.

And then we can look at the diversification in that space means that some of the other semi-cap OEMs. I really want to continue the vertical integration that Jim and Clarence already did in the past 5 years. And integration is part of that, that we can further expand the engineered product as long as it fit our core competency and also fit in the vertical integration strategy we have.

And finally, as Horizon 2 or 3, we can look at all the areas you mentioned. So -- but I think that we'll have an upcoming investor conference, and we can share more of my growth strategy with you and the other folks.

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

Thank you for joining us for this earnings call. I look forward to further chat with you at the follow-up call.

Thank you.

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

Good afternoon, ladies and gentlemen, and welcome to the Ultra Clean Technology Reports Q2 2025 Financial Results Conference Call. [Operator Instructions] This call is being recorded on Monday, July 28, 2025. I would now like to turn the conference over to Ms. Rhonda Bennetto, Investor Relations. Thank you. Please go ahead.

Thank you, operator. Good afternoon, everyone, and thank you for joining us. With me today are Clarence Granger, Chairman and Interim CEO; Sheri Savage, CFO; and Cheryl Knepfler, VP of Marketing. Clarence will begin with some prepared remarks about the business, and Sheri will follow with the financial review, 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 Clarence. Clarence?

Thank you, Rhonda, and good afternoon, everyone. We appreciate you joining our second quarter 2025 conference call. I'll start with a brief review of our Q2 results, followed by an update on 3 areas of focus for us, including new product introduction, flattening the organization and business structure and processes. After that, I'll turn the call over to Sheri for a more detailed financial review.

As we discussed during our last earnings call, we anticipate our quarterly revenue will continue to bounce around the $500 million revenue for the balance of this year. With this in mind, we are continuing to focus internally on what we can do to enhance our overall business performance.

Specifically, we are focused on 3 key areas. The first of these is NPI or new product introduction and component qualifications with our customers. During these slower times, our customers have more time to partner with us on new business qualifications. We have already been awarded some new business in our Czech Republic facility that should result in an incremental revenue increase in Q4.

We are also working with all of our major customers on qualification by our Fluid Solutions group. Since the Fluid Solutions components are going into subsystems that UCT already manufactures, it will not increase our overall revenue. However, it will enhance our margin profile. We expect to see the benefits of this beginning early in 2026. The second focus of our actions has been on flattening the structure and reducing the overall size of the organization to improve efficiency.

As I've previously mentioned, we had anticipated a return to industry growth in 2024, and we were scaled to grow at a $4 billion run rate to support this. Unfortunately, given market conditions, we are currently operating at a $2 billion run rate. With this reality, we have taken steps to flatten and reduce the size of the overall organization.

Specifically, we have had significant workforce reductions in April and July, and you can see the results of this effort in the reduction of our OpEx during Q2. While we anticipate some churning in this area during Q3, we anticipate this effort to be finalized in the coming months with notable savings heading into Q4. Larger, more complex initiatives, including driving factory efficiencies, consolidating sites and streamlining organizational layers are ongoing.

While these more comprehensive strategies will take time to realize their full impact, they are critical to strengthening our long-term competitiveness. Importantly, these value-creation initiatives are being executed in a way that preserves our ability to scale effectively and capture growth opportunities as market demand returns. Our third area of focus is on business systems and final integration of our acquisitions, including Fluid Solutions, Services and HIS into UCT's core systems and processes.

In the Fluid Solutions group, we just implemented our company-wide SAP business system at the beginning of July. This will add some integration costs in Q3, but will make us much more efficient by the end of the year. We have also completed strategic alignment between our Products Group and Fluid Solutions on qualification priorities with our customers. This will help us both with new business and improve margins.

In the Services Group, we have identified several strategic new marketing initiatives to enable us to more fully utilize our factories. In addition, we have flattened the organization of the Services Group by combining the manufacturing and business unit functions under one leader. Finally, in our HIS business, we are working on streamlining the facilities and consolidating leadership positions for greater efficiency.

These initiatives are all crucial as they enhance operational alignment, drive efficiencies and capture additional value across the entire organization. And a quick word on tariffs. While they remain technically paused on semiconductors, uncertainty persists, and we have seen some cost increases throughout our supply chain. While our customers have all said they will assume responsibility for the tariffs that are incurred from components they have specified, most of them have not yet paid us for these additional costs.

As such, we continue to take a cautious stance and have accounted for some additional risk in our outlook. So far, we have not seen changes in customer demand relating to tariffs. And lastly, our CEO search is nearing completion on schedule. We anticipate making an announcement in the coming weeks. In summary, before I turn the call over to Sheri, while near-term business conditions remain fluid, UCT maintains strong confidence in the long-term fundamentals of the semiconductor industry, supported by increasing manufacturing complexity and sustained capital investment in AI.

Recent months have seen a notable acceleration in AI-related investment fueled by a surge in venture capital funding, heightened corporate and institutional interest and a positive market sentiment. Although the trickle-down effects of these investments will vary across the equipment manufacturing supply chain, UCT is well-positioned to capitalize as industry momentum builds, particularly through our deep customer partnerships, proven execution and expanding portfolio of vertically integrated solutions. These strengths reinforce our competitive position and enable us to support our customers' evolving technology road maps with agility and precision.

With that, I'll turn the call over to Sheri.

Thanks, Clarence, and good afternoon, everyone. Thanks for joining us. In today's discussion, I will be referring to non-GAAP numbers only. UCT's second quarter results reflect the challenges and complexity of navigating a dynamic environment spanning a broad range of customers and product offerings. Amid shifting demand trends, our ability to remain agile, meeting delivery commitments while reducing operating expenses demonstrates the meaningful progress we're making on our cost efficiency initiatives.

For the second quarter, total revenue came in at $518.8 million compared to $518.6 million in the prior quarter. Revenue from Products was $454.9 million compared to $457 million last quarter. Our Services business had a solid quarter with revenues increasing from $61.6 million in Q1 to $63.9 million in Q2. Total gross margin for the second quarter was 16.3% compared to 16.7% last quarter.

Product gross margin was 14.4% compared to 14.9% in Q1 and Services was 29.9% compared to 29.8% last quarter. 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. Operating expense for the quarter was $56.1 million compared with $59.4 million in Q1.

As a percentage of revenue, operating expenses were 10.8% versus 11.5% in Q1. This decrease reflects the positive impact of our cost reduction initiatives in the quarter as well as a return to normal operating level following higher year-end costs seen in Q1. As Clarence noted, we have incremental SAP go-live costs flowing into Q3. However, we will continue to implement broader cost-saving actions that will further reduce OpEx incrementally over the long term.

Total operating margin for the quarter came in at 5.5% compared to 5.2% last quarter. Margin from our Products division was 4.8% compared to 4.6% and Services margin was 10.5% compared to 10.2% in the prior quarter. Our second-quarter tax rate remained flat at 20%. Our mix of earnings between higher and lower tax jurisdictions can cause our rate to fluctuate throughout the year.

For 2025, we expect the tax rate to be in the low to mid-20s. Based on 45.3 million shares outstanding, earnings per share for the quarter were $0.27 on net income of $12.1 million compared to $0.28 on net income of $12.7 million in the prior quarter. Turning to the balance sheet. Our cash and cash equivalents were $327.4 million compared to $317.6 million at the end of last quarter.

Cash flow from operations was $29.2 million compared to $28.2 million last quarter, mostly due to working capital efficiency. Earlier this quarter, we repurchased 182,000 shares at a cost of $3.4 million as part of our repurchase program. The tariff situation for semiconductors remains unchanged, but we are seeing some impact throughout our supply chain.

We will continue to monitor the landscape and make the necessary adjustments to our business to maximize efficiency and protect profitability. Given the heightened uncertainty and limited visibility within the semiconductor market at this time, we project total revenue for the third quarter of 2025 to be between $480 million and $530 million. We expect EPS in the range of $0.14 to $0.34. And with that, I'd like to turn the call over to the operator for questions.

[Operator Instructions] and your first question comes from the line of Charles Shi from Needham.

Clarence and Sheri, maybe the first one, I think you probably didn't address that Q2 revenue went a little bit above the midpoint of your Q2 guidance. Mind if you kind of walk us through what was the upside there in Q2?

Well, we had a little bit of upside from China. That was helpful. I'm trying to think of what other areas. We did have some general increase in shipments from one of our U.S. sites, our Austin site. We also had an increase in our Services revenue. I think those are the major areas where we had increases.

Got it. So just a follow-up on the China business. So I think the expectation a quarter ago was China revenue probably would come off the bottom in Q1, a little bit better in Q2 and the second half going to be better than the first half. Is that still the case?

Yes. Again, this is Clarence. Yes, that is true. But we do want to make sure we characterize this appropriately. I know I brought up the China revenue because I know it's a common question. But the China revenue represents about 7% of total UCT revenue. So it's not huge, but I will give you the numbers.

The numbers in Q1 were about $21 million. And in Q2, they were about $35 million. So it's a significant increase. And we've said that we expect on an ongoing basis in China and our China for China strategy to be running about $40 million to $50 million a quarter with revenue out of our Chinese-based customers. And so it feels like we're pretty close to being where we thought we would be at this time.

Thanks, Clarence, the extra color there. Maybe I'll ask my last question. So you said at the beginning, your -- it sounds like you're still expecting $500 million per-quarter run rate through the rest of the year. But I think you also mentioned some new wins from your Czech sites is going to contribute a little bit into Q4. Not sure if you're alluding to maybe Q4 revenue numbers may grow sequentially from Q3 or maybe I overread that.

Yes, you didn't necessarily overread that. We're not in a position where we're ready to commit to Q4 numbers. But it certainly feels like there's an upward bias in Q4. We're kind of feeling pretty good about our directionality in -- towards the end of the year. Not that the revenue is going to increase that dramatically, but we think by that time, we'll see the impacts of a lot of the cost reductions that we've implemented and some of the new business opportunities and some of the further integration of Fluid Solutions. So we're cautiously optimistic that the fourth quarter will get better.

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

I had a couple of questions. Number one, thanks for the color on China. You said it might run rate at about $35 million to $40 million, just under 10% of your revenues. I'm kind of curious, last week, there were some AI rules, which said that they might look into components of semi-caps that are selling into China. So I'm kind of curious, have you looked into that? And do you think there's a risk that this revenue that you're selling into Chinese semi caps could go to 0?

Yes. I'm going to let our analyst -- market analyst, Cheryl Knepfler, answer that one. Cheryl?

So yes, I mean, obviously, there's always a risk that it could go forward at a different level. But at this point, we do see that the areas that we're selling to are being supported broadly for multiple parts of the industry, and so do expect to be able to continue to sell for the upcoming period.

Got you. So just to clarify, Cheryl and Clarence, $35 million last quarter, you think it's going to be $35 million to $40 million. Do you think that run rate so far is sustainable and you've not heard anything from the government or anybody about potential caps on that?

That's correct. We have not heard anything about potential caps. We're pretty optimistic. Don't forget, we've been there for 20 years. So it's not like we're newbies to the country. And our customers, our major customers, some of them have actually been customers of ours for 20 years. So we're very confident in our relationship there. And so far, we're very confident in what's going on with the government situation relative to us.

Got it. Got it. And then another question. You kind of said that I think China revenues are marginally better in the second half. I'm kind of curious like when you look into -- compared to your earnings call 3 months ago, did the commentary from China get marginally better? Or was it the same thing compared to 3 months ago in terms of China demand either through AMAT and Lam or through your China semi-cap customers into the second half of this year?

I think I mentioned -- this is Clarence again. I think I mentioned at one point at the end of Q1 that one of our customers was having some challenges with one of their customers and as a consequence, weren't taking at the same rate that they might normally have been taking at. We feel that those issues have been resolved, and our customer is now taking a rate that's more in line with what we've traditionally been expecting from them.

And if you can squeeze in one follow-up to that, Clarence. I think last time you also mentioned it is one Chinese customer and also there was one European customer who had some delays, which many people assume to be ASMI. I'm kind of curious, has that European customer issue been resolved?

Yes, we shipped units to them as well in the quarter.

And your next question comes from the line of Christian Schwab from Craig-Hallum Capital Group.

Kind of given the tremendous strength in AI as well as rumors of what looks to be increased investment in Samsung in Austin, Texas, which I assume you'll benefit from. Do you guys have an initial look or thought when market demand possibly returns as soon as calendar '26, what WFE could look like yet?

So this is Cheryl. As we look at WFE in 2026, there are a number of fabs that are expected to come online, some of which are being pulled in from 2027 into 2026. So we do see the opportunity for 2026 to have incremental growth from 2025. At this point, not certain the level, but certainly possible for high single-digit, low double-digit type of growth.

Okay. So kind of in line with some of the optimistic third-party research out there, kind of that 8% to 12%. And then my follow-up question regarding that in a situation such as that, would you expect your company to be able to outgrow WFE in a double-digit range like you have historically done in an upturn?

We certainly see the mix of products and our share gains as supporting that opportunity. So definitely going forward, the balance -- most of the companies have brought in EUV. And so that initial sort of disconnect that happens when a new segment brings in some of those technologies has passed for both DRAM and for foundry. So we expect our segments to grow with WFE, and we should be able -- we expect to outperform them overall.

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

Clarence, you mentioned being cautiously optimistic on the 4Q, and you listed a number of different items. But if you were to rank order them, you talked about new business wins and qualifications. You talked about China a bit. The prior questionnaire asked about AI strength. If you were to rank these items in order, how would they shake out and your level of visibility on each?

Well, the new business win is the most tangible one that we can tie to real, near-term market gains. We actually have orders going forward. So we're confident in that. The China situation, I would say we feel pretty confident, but that could change, obviously. I guess probably the thing that still remains the most frustrating for me is the darn tariff situation. It doesn't feel like it's going to be a huge cost to us. This last quarter, it looked like about $500,000 in the quarter.

But our customers took about $3 million -- we incurred about $3 million worth of tariff charges associated with the quarter. And we've been paid by the customers about $300,000 and they claim they're going to pay us another $2 million, but we haven't got it yet. And so I guess that causes us to be a little concerned, although we've gotten verbal commits from them. I forgot what was the other one that you -- oh AI. Honestly, Cheryl, AI is -- that's a little distant from us. I mean we certainly know about it and hear about it, and it should have a favorable impact on us, but we don't have specific orders tied to that right now.

And following up on the tariff reimbursement, is it your leading-edge customers that haven't paid you for the balance? Or is it -- I'd just like to understand where the disagreement might be or, I suppose.

No, no, no, the others -- yes, there's no disagreement. Don't get me wrong. They're just slow to pay. They're our largest customers.

Got it. There is no credit risk there...

No, no, no. There's absolutely no credit risk. It's just a matter of getting the documentation in the format that they're comfortable with. I'm comfortable they will eventually pay us. But the other downside with the darn tariffs is the cost, right? We're spending -- we'll probably end up spending about $1 million to $2 million a year in administrative costs to deal with it.

So my guess is over the time -- I mean, it's not overwhelming, but my guess is that over -- on an annualized basis, we'll probably spend about $2 million to $3 million a year dealing with tariff costs. And so what does that work out to be about $0.06 a year. So we could be ending up $0.015 each quarter that we have to deal with that we're frustrated about.

Okay. That's helpful. And final question for me. I'd just like to better understand the goodwill impairment charge. What was driving that?

Yes. This is Sheri, Ed. The key thing is our stock price had gone down with the overall market uncertainty. And unfortunately, with that happening, our carrying value of those -- that goodwill on our books was lower than the market cap of the company. So that's what basically triggered the accounting of that. It's purely a noncash charge, obviously.

But that doesn't mean that we're not very bullish about those businesses on a go-forward basis in terms of what we think that they can do. It's just more of our -- our assumptions now are a little more conservative than when we initially bought the business when we put our goodwill calculation in place. So it's just -- it's really a factor of our market cap at this point.

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

I've had 2 questions. And first, I do appreciate the candidness about China and tariffs. I'm kind of curious, I understand China tariffs is on top of your mind. I'm just really honestly curious if the $35 million to $40 million in revenue you get from China semi caps, do you worry that, that could ever go to 0? Or do you think realistically that is not a possibility?

Well, first of all, I want to make clear, we don't have China tariffs because all of the stuff that we make in China stays in China and all the stuff that we make outside of China does not go into China. So we really don't have a China tariff issue. There would only be an issue if for some reason, something happened to our long-term revenue from China. I don't think there's any jeopardy whatsoever.

As I said, we have strong relationships with our existing customers, and we can't see them leaving us. Obviously, there's always some political -- potential political ramifications, but we are not typically -- we are supplying what's specified by the customer. We're not supplying them with technology that they don't have available to them already. So I don't think we're a real threat from a technological standpoint. So I don't think there's much danger of us having an issue with China.

I apologize. I didn't mean China tariffs, I mean tariffs in general. Let me rephrase the question. Do you worry about the $35 million to $40 million that you sell into China semi caps going to 0?

I worry about every single one of our customers, every single place in the world, but I don't worry about them any more than I worry about our other customers and focus on our growth with other customers.

Fair enough. And then one quick question. I'm just kind of curious, is it broad-based amongst all your customer base, U.S., China, whatever it is, how do you think the inventory situation is of your gas panel components, et cetera, is like do you think they are like drawing it down enough that they got to start buying it more? Or do you think there's still like a little bit of a lag effect really because you still have some inventory of your components on their balance sheet?

So this is Cheryl. I think there's probably a little bit left, but I don't think that it's significant at this point. I think our largest customer was the one that we had the most exposure with. They are continuing to work down that inventory in part by sending it back to us to be reconfigured. So we do see that happening.

So I think they are now getting to a point where they don't have very much and it may not align with what some of their current shipment demand is. So we do see that certainly cleaning up a lot more. But obviously, everyone will periodically find a series of things stuck in a corner. So I think that's kind of where we are now versus a broad amount of inventory that's sitting.

There are no further questions at this time. I will now hand the call back to Clarence Granger for any closing remarks.

Thank you, everyone, for joining us on our call today, and we look forward to seeing you again in October. Thank you.

This concludes today's call. Thank you for participating. You may all disconnect.