Prepared remarks
Good afternoon, ladies and gentlemen, and welcome to the Ultra Clean Technologies Fourth Quarter 2025 Financial Results Conference Call. This call is being recorded on Monday, February 23, 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. 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 sole earnings call as CEO. And as I approach nearly six months in a row, I remain very energized by the opportunity ahead of us. We have spent significant time across our global sites, meeting with employees, customers, and partners and have developed an even deeper conviction 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 defining advantages for long-term winners like UCT.
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 witnessing is not a normal cyclical upturn. It is an AI technology inflection. The center of gravity has shifted from consumer electronics to AI infrastructure, physical AI, autonomous driving, and other AI applications. The evolving AI road map from generative AI to physical and agentic AI and ultimately, artificial general intelligence, or AGI, 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 leading edge fabs deploy new materials like molybdenum and new structures such as gate-all-around and high-bandwidth memory. These technologies require tight integrated solutions across deposition and removal with increased edge CapEx intensity, which provide a tremendous growth opportunity for UCT. All these market drivers should lead to a multiyear WFE upturn once wafer fabs address their near-term clean room constraints. Our technology co-innovation is tightly aligned to our customers' roadmaps. We expect to see strength around etch and deposition, especially ALD and high-precision etch to support gate-all-around and backside power distribution 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 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 sense of urgency, efficiency, and accuracy. Leveraging our global talent and 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 optimizations 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 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 clean room 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 skilled workforce required and leverage automation and lean capabilities to scale capacity efficiently. Having well-planned extra capacity entering a technology inflection of this magnitude is a strategic competitive advantage. This allows us to support customer roadmaps while capturing pull-in and drop-in opportunities and responding rapidly to urgent need and frequent changes that others may struggle to support. In addition to our ramp readiness initiatives, we're also accelerating the design to production cycle, expanding our participation in high-value new product introductions at the leading edge nodes and strengthening strategic technology integration with our customers. A key enabler of this is our expanded MPX strategy, which is comprised of new product introduction, new product development, and new product transition.
Together, they will position UCT to co-innovate earlier, ramp faster, and manufacture 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, shortening 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 $4 billion 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 spending, 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 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, 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 increase sequentially, we expect improved operating leverage and meaningful margin expansion.
Operating expenses for the quarter were $56.6 million compared to $57.7 million in Q3. As a percentage of revenue, operating expenses were 11.2% 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 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 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 were $1.05 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 $65.6 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 the operator for questions.
Questions and answers
Your first question comes from the line of Charles Shi from Needham.
I want to start with your overall view on WFE. Back in January, I believe you mentioned a projected WFE growth in the low to mid-teens. In your presentation, I noticed the projection is between $125 billion and $135 billion, but I'm not clear on your base numbers. Could you provide a clearer picture of your WFE forecast for this year? Additionally, the Q1 guidance appears to be at the midpoint on a year-on-year basis, showing only a slight increase. This suggests you might be anticipating a very strong pickup in the second half. I am curious about how the year is expected to shape up.
Charles, let me address your questions, and I'll have Sheri add her thoughts. As I mentioned at the Needham conference a month ago, we are seeing a weekly increase in our forecast. Currently, we believe that the overall WFE will be larger than it was a month ago, with an anticipated growth of 15% to 20% year-over-year. Regarding your second question, we do not see the same year-over-year and quarter-over-quarter patterns from our customers that you might expect. However, we do anticipate a significant increase from Q3 to Q4. If you look at the average, the increased rate is actually consistent with our customers' growth rate.
James, just to clarify, you mentioned a significant increase. Are you indicating that the revenue run rate in September will show a strong rise from June, and that there will be another substantial increase from September to December? Is that what you meant?
Yes. I think that you're right. So look forward, we definitely see 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.
James, I had 2 of them. One is, if WFE 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 half weighted 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 a 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. I think that we will see another growth in Q2 already, but more step function in the second half. It's a great question. From what we've heard from our customer, the wafer fabrication equipment market in China is expected to remain stable in 2026. Given the significant growth in the global WFE market, the share of the China WFE market is likely to decrease. For our business with China OEMs, we also anticipate a stable forecast for 2026. However, it's important to note that this segment accounts for less than 7% of our total revenue, so I wouldn't place too much emphasis on it.
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, Ed, I think that I will answer that, and maybe Brian, you can chime in. So overall, I really see, as I said, we're running at 65% of the utilization rate today, and we see definitely 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 a very disciplined operation cadence. So we will not grow the OpEx and IDL as the revenue growth. So that discipline will also give us margin expansion opportunities and Brian, maybe you want to talk more on the model standpoint.
Yes, looking at the transition from Q3 to Q4, we had a favorable product mix in Q3 that did not carry over into Q4. Our margins are subject to fluctuation due to various factors including volume, product mix, manufacturing locations, tariffs, and transportation costs. Many elements influence our margins from one quarter to the next. For Q1, we anticipate that results will be similar to Q4, possibly with slight improvements in Q1. However, as volumes increase in Q2, 3, and 4, we expect to see significant margin expansion.
Ed, that's an excellent question. From what we gather from our customers, some of them believe that the shortage might persist until 2028. We’ve noted that Micron, Samsung, and SK are significantly investing in new projects while also converting existing facilities to meet immediate demand. This suggests a multi-year growth period for the memory sector. Additionally, as we examine market demand, HBM will impact the capacity in DRAM factories. This means there's a need for increased WFE investment to support HBM capacity expansion while trying to balance supply and demand in the standard DRAM market. Furthermore, in terms of NAND, we still see an upgrade trend from previous generations to newer versions. Lam has indicated a $40 billion investment for NAND capacity upgrades over several years, and they plan to adjust their models based on demand, including for eSSD. Overall, we genuinely believe that NAND will experience multi-year growth, and our customers are noting a 22% compound annual growth rate for AI-specific memory, which is 2 to 3 times that of the regular memory market.
So James, with the 65% utilization rate and your recent facility optimization over the last 1.5 years or 2 years, how should we be thinking about what utilization rate or 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. What we observe currently is a weekly decline in our forecasts. However, we remain optimistic regarding our quarterly run rate and expect to fill our capacity swiftly. We are shifting our focus toward Asian manufacturing, aligning with our customers' global manufacturing strategies. Soon, our Asian factory will be fully operational, ultimately representing 60% of our global capacity and matching our customers' manufacturing presence. With increased utilization and a strong focus on Asian manufacturing, we anticipate a significant positive impact on our margin profile. Yes, you're right. 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-edge foundry logic customers ramp up their factories in U.S. We definitely see we're well positioned for that U.S. foundry logic ramp in addition to our current customer we're serving in U.S. 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.