Ultra Clean Holdings, Inc. (NASDAQ:UCTT) Q2 2025 Earnings Call Transcript

Ultra Clean Holdings, Inc. (NASDAQ:UCTT) Q2 2025 Earnings Call Transcript July 28, 2025

Ultra Clean Holdings, Inc. reports earnings inline with expectations. Reported EPS is $0.27 EPS, expectations were $0.27.

Operator: 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.

Rhonda M. Bennetto: 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?

Clarence L. Granger: 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.

Sheri L. Savage: 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 remain 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.

Q&A Session

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

Yu Shi: 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?

Clarence L. Granger: 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.

Yu Shi: 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 first half. Is that still the case?

Clarence L. Granger: 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.

Yu Shi: 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 check 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.

Clarence L. Granger: 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.

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

Krish Sankar: 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?

Clarence L. Granger: Yes. I’m going to let our analyst — market analyst, Cheryl Knepfler, answer that one. Cheryl?

Cheryl Knepfler: 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.

Krish Sankar: 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?

Clarence L. Granger: 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.

Krish Sankar: 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?

Clarence L. Granger: 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.

Cheryl Knepfler: 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?

Clarence L. Granger: Yes, we shipped units to them as well in the quarter.

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

Christian David Schwab: 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?

Cheryl Knepfler: 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.

Christian David Schwab: Okay. So kind of in line with some of the optimist 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?

Cheryl Knepfler: 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.

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

Hoonshik Yang: 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?

Clarence L. Granger: 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.

Hoonshik Yang: 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.

Clarence L. Granger: 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.

Hoonshik Yang: Got it. There is no credit risk there…

Clarence L. Granger: 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.

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

Sheri L. Savage: 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.

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

Krish Sankar: 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?

Clarence L. Granger: 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 stream 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 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.

Krish Sankar: I apologize. I didn’t mean China tariff, 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?

Clarence L. Granger: 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.

Krish Sankar: 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?

Cheryl Knepfler: 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.

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

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

Operator: This concludes today’s call. Thank you for participating. You may all disconnect.