Ultra Clean Holdings, Inc. (NASDAQ:UCTT) Q3 2025 Earnings Call Transcript

Ultra Clean Holdings, Inc. (NASDAQ:UCTT) Q3 2025 Earnings Call Transcript October 28, 2025

Ultra Clean Holdings, Inc. beats earnings expectations. Reported EPS is $0.28, expectations were $0.24.

Operator: 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.

Rhonda Bennetto: 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?

Clarence Granger: 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?

James Xiao: 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.

Clarence Granger: 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?

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

Q&A Session

Yu Shi: 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.

James Xiao: 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].

Rhonda Bennetto: Go ahead, Charles.

Yu Shi: 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?

Sheri Brumm: 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.

Clarence Granger: 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.

Yu Shi: 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?

Clarence Granger: 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.

Operator: Your next question comes from Krish Sankar of TD.

Robert Mertens: 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.

Clarence Granger: 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.

Robert Mertens: 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?

Sheri Brumm: 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.

Clarence Granger: 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.

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

Christian Schwab: 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?

James Xiao: 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.

Operator: Your last question comes from Edward Yang of Oppenheimer.

Edward Yang: 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?

Cheryl Knepfler: 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.

James Xiao: 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.

Edward Yang: 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.

James Xiao: 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.

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

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

Rhonda Bennetto: Thank you.

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