Prepared remarks
Good afternoon, ladies and gentlemen, and welcome to the Ultra Clean Q2 2026 Earnings Call. This call is being recorded on Monday, August 3, 2026. I would now like to turn the conference over to Rhonda Bennetto of Investor Relations.
Thank you, operator. Good afternoon, everyone, and thank you for joining us. With me today are James Xiao, CEO; Sheri Brumm, CFO; and Mike Keogh, CFO beginning August 5. 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'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 our Q2 '26 earnings call. This afternoon, I will discuss industry environment and the trends shaping our customer investment, provide an update on our execution against UCT 3.0 strategy and highlight how we are positioning UCT to deliver sustainable growth and long-term value. Following that, Sheri will provide a financial update and then we will open up the call for questions. Throughout the second quarter, we saw increased demand across both our products and services businesses, reflecting healthy activity across all our end markets. Momentum is building as AI-driven investment reshapes the semiconductor capital equipment landscape, driving increased volume and complexity in the systems and components our customers require. As agentic AI becomes more mainstream, the incremental demand extends well beyond today's GPU-intensive training clusters; we see workloads utilizing higher volumes of CPU compute. For companies like UCT, the implications are particularly meaningful because every layer of semiconductor manufacturing must scale to support this next wave of infrastructure investment and AI chip demand expansion beyond GPU and HBM. As volume and complexity increase, customers are engaging more strategically with trusted partners like UCT earlier in the development cycle to help ensure manufacturing readiness and accelerated execution. As technologies advance, we're confident that we will play an even more important role in our customers' long-term technology road maps and capacity expansion. That confidence is reinforced by the unprecedented visibility our customers are sharing with us now. They are extending their forecasts and giving us longer planning horizons so we can make strategic decisions regarding capacity, supply chain readiness, engineering resources and talent investments that support their product pipeline. As AI infrastructure scales, execution speed and innovation velocity at scale will set UCT apart from the competition. Our customers want partners that can accelerate product development, qualify new technology faster, execute flawless production ramps and support increasingly complex global manufacturing operations. UCT is becoming more deeply embedded in their success because these are the capabilities that consistently set us apart. The UCT 3.0 strategy is transforming the way we execute. Being ramp ready is foundational to our customer-first mindset and long-term growth strategy. It ensures we're prepared to support our customers whenever they need us. Over the past couple of months, we have built out an additional 26,000 square feet of clean room space in our Malaysia facility and will be increasing our capacity within the current footprint in Singapore and the Czech Republic over the coming quarters. With those expansions we should be able to support a $4 billion annualized revenue run rate with $200 billion WFE by the middle of 2027. We have begun the process of evaluating future capacity requirements, strategic geographic locations and greenfield opportunities to support a $5 billion revenue run rate with $250 billion WFE. We will continue to align our investments with our customers' long-term demand outlook and commitment. Our NPX initiative, which integrates new product development, introduction and transfers, reached a significant milestone recently. We have launched our first NPX Center of Excellence in Hillsboro, Oregon, designed to engage earlier and more closely with our customers. This will accelerate product qualification, improve the transition from development to high-volume manufacturing and strengthen our position as the preferred co-innovation partner. By demonstrating our value from design to production, we're increasing our opportunities to win customers' new products that support a favorable long-term margin profile. Digital transformation, the third pillar of our UCT 3.0 strategy, is enabling a more efficient, data-driven enterprise. We have begun modernizing our systems, processes and data infrastructure, starting with those that best support our ramp readiness efforts. These initiatives have already improved operational visibility, accelerated decision-making and enabled faster execution across our global operations. Combined with automation, advanced analytics and AI-enabled capabilities, we're increasing productivity and scaling the business more efficiently as customer demand accelerates. We believe our global manufacturing footprint, engineering expertise, operational discipline and ability to execute with speed and agility position us to capture a greater share in the years ahead. Our objective is straightforward: to deepen our strategic co-innovation partnerships, outgrow the market we serve and create sustainable long-term value for our shareholders. Before I turn to the financial review, I'd like to announce that this is going to be Sheri's last earnings call as CFO of UCT. I'd like to take a moment to recognize and thank Sheri for her 17 years of dedicated service to UCT. Sheri has been a trusted leader and an exceptional steward of our business, helping guide the company through a period of significant growth and transformation while strengthening our financial foundation. On behalf of our Board of Directors and the entire UCT family, thank you, Sheri, for your many contributions and unwavering commitment to the company. We wish you all the best in your well-earned retirement. Over to you for the financial review. 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, this will be my final earnings call with UCT. It has been a privilege to be a part of UCT's growth and transformation over the past 17 years, and I want to sincerely thank our employees, customers, investors and partners for your support. Before I begin, I'd like to welcome Mike Keogh, our new Chief Financial Officer. Mike brings extensive financial, operational and public company leadership experience and I am confident he will be a tremendous asset to the team as they continue to advance the UCT 3.0 growth plan. For the second quarter, demand remained healthy across both products and services businesses. Those market dynamics supported another quarter of solid execution and financial performance. For the second quarter, we saw record total revenue of $644.9 million compared to $533.7 million in the prior quarter. Revenue from products was $572.7 million compared to $465.7 million last quarter. Services revenue was $72.2 million in Q2 compared to $68.0 million in Q1. We continue to invest in capacity to support our customers' long-term growth. We recently added 26,000 square feet of clean room space in Malaysia with additional expansion planned in Singapore and the Czech Republic soon. These investments position us to support an annualized revenue run rate of approximately $4 billion by mid-2027, while planning is underway for the next phase of capacity expansion to support a $5 billion run rate over time. As production increases, we expect to benefit from improved operating leverage and corresponding margin expansion. Total gross margin for the second quarter was 16.7% compared to 16.5% last quarter. Products gross margin was 15.1% compared to 14.6% in Q1 and services was 28.9% compared to 30.0% last quarter. Gross margin improved primarily due to 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 $62.5 million compared to $51.1 million in Q1. As a percentage of revenue, operating expenses were 9.7% versus 11.4% last quarter. Total operating margin for the quarter came in at 7.0% compared to 5.1% last quarter. Margin from our Products division was 6.5% compared to 4.2% and services margin was 11.2% compared to 11.5% in the prior quarter. Second 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 million shares outstanding, earnings per share for the quarter were $0.70 on net income of $32.3 million compared to $0.31 on net income of $14.5 million in the prior quarter. Turning to the balance sheet, cash and cash equivalents were $255.9 million compared to $323.5 million at the end of last quarter. Operating cash flow was negative $41.1 million compared to negative $33.3 million last quarter. The year-to-date cash outflow continues to reflect strategic investments in working capital, particularly in inventory to support anticipated demand and position the business for future growth. Turning to the guidance for the third quarter, we project total revenue to be between $700 million and $750 million and EPS in the range of $0.83 to $1.03. 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 Timothy Arcuri from UBS.
Just on the guidance, it was quite good, and it was right where I thought it would be. But it could have been even better when you consider that your biggest customer guided its systems up, implying that systems are going to grow about 30% quarter-on-quarter in calendar Q3. I realize your product revenue outgrew their systems in June. So is it really just a timing thing? Or do they have some inventory or maybe you're being a little bit conservative in your guidance?
Yes, it's a little bit of both, Tim. I think that definitely you realize that we have a timing gap with certain customers, where they need to integrate our subsystem into their systems, and there's a timing lag. The revenue recognition timing is different because of that. For some other customers, their quarter ends are a little bit different from ours, so that created a timing gap on the revenue growth. But if you aggregate a two-quarter revenue growth, you will see that our revenue is on par with their growth or higher.
And then we've heard some examples where all your customers are so full on capacity — they're basically booking into the back half of '27, if not some of them into '28. So is there an opportunity for them to use you as overflow, where they come to you to maybe do some things they had originally planned to do themselves? That could drive your revenue upside given how full their internal manufacturing is.
Yes. Definitely, we see that upside opportunity, especially when customers are constrained by their internal capacity. In this upturn, as you know, they intend to focus more on final test and final integration capacity and overflow their subsystem capacity to partners like UCT. Historically, we see growth opportunities when customers give a higher percentage of their subsystem builds to UCT in the upturn. This is why we always expect to outgrow the market on the product side in an upturn.
Your next question comes from the line of Charles Shi from Needham.
Congrats on the next results. I have a question on the capacity plan. I think I heard you talk about maybe getting the $4 billion run rate ready by mid-2027, looking at $5 billion run rate over time. On the $4 billion, what's the current judgment on the timing? Might you have to do it a little earlier than mid-2027? Or what's the range of possibilities? And on the $5 billion, what do you have to see to pull the trigger to really start that expansion to the $5 billion run rate?
Thank you, Charles. I think that we're taking a phased approach from $3 billion to $4 billion and then from $4 billion to $5 billion, and we're executing on that plan. By the end of this year, you will see about $3.5 billion of capacity ready. In the first half of 2027, we expect to hit the $4 billion run rate in capacity, and we're going full speed on that. As you saw in my statement earlier, we're adding 26,000 square feet at our Malaysia site, and we're doing similar expansions in Singapore and the Czech Republic. For the $5 billion run rate and to address a $250 billion WFE, we're evaluating new expansion plans in Southeast Asia and we'll make that decision quickly and start execution. The timeline we currently expect is reaching beyond $4 billion and approaching a $5 billion run rate in the second half of 2028.
That's pretty clear. Sheri, congrats again on the well-deserved retirement — glad to have worked with you for quite a few years. Maybe as Mike is also here, any early thoughts from Mike on how to think about the margin model going forward? I know the team has laid out a goal of 20% gross margin and 10% operating margin at a $4 billion revenue run rate, but since the $4 billion is coming, any thoughts on long-term aspirational margin targets?
Thank you for the kind comments. I'll be handing calls over to Mike at this point, but to address incremental margins, we do see them continuing to move up as we utilize more of our factories. We expect to move toward the mid-to-high teens gross margin range as we move through the rest of the year and hopefully move beyond that. The $4 billion and 20% gross margin is still the goal that we are marching toward, especially during 2027. Beyond that, we'll provide a detailed model at some point, but that's the goal we're still pursuing with improved utilization of our factories.
Your next question comes from the line of Krish Sankar from TD Cowen.
This is Eddy for Chris. A question on customers beyond the biggest two customers: it seems that the customer base has been growing year-over-year. Can you give us some color on what's driving that and how you think about it going forward? I have a follow-up.
Yes. If you look at our quarter-by-quarter customer distribution, the top two customers' percent of revenue actually reduced from the mid-60s down to the high-50s. That shows we're diversifying our customer mix, which makes us less volatile regardless of segment moves within WFE. We're growing our business with lithography customers, and as EUV gains momentum and more adoption in leading-edge foundry logic and memory, we'll see growth in that area as well. In 2026 and 2027 we still see WFE having more depth and etch intensity, so we do not expect the percentage of overall etch to decline significantly, but we'll definitely grow in that segment too.
Got it. Just a clarification about the previous question: you mentioned when you get to full utilization your gross margins would be 20%. At what level of revenue run rate is that full utilization? Would it be $4 billion? Because I think the September guide implies around 19% gross margin.
Again, it depends on multiple factors, including mix of revenue, where things are shipped from and jurisdictional impacts. Our goal is to be at $4 billion and 20% gross margin. There are many factors that go into that, so it depends on where we're at at that moment. But we anticipate that we will be at a run rate of $4 billion at some point during 2027.
Your next question comes from the line of Ed Yang from Oppenheimer.
One of your competitors reported some issues with component shortages in the second quarter. Did you run into any similar problems? Were there any delivery pushouts in the quarter?
No. We proactively initiated our ramp readiness campaign internally well ahead, so we were able to secure most of the critical components and mitigate shortages at this point. Looking forward, the industry is implying double-digit quarter-on-quarter growth, which will continue to put pressure on the entire supply chain. You may see excursions in the WFE supply chain, and we need to actively and proactively manage that.
Okay. Your comments around WFE suggest that by mid-2027 you expect to see a $200 billion WFE run rate and for UCT a $4 billion revenue run rate. You also hinted at 2028 growth, implying you'll add capacity beyond the $4 billion run rate for 2028. What informs that outlook? Is it order book, customer outlook? Would love some color.
We see a good chance for the whole industry to exceed $200 billion WFE sometime in 2027. There is a range between roughly $190 billion and $220 billion, and we're preparing for the bull case. We believe that having additional capacity will be a competitive advantage in this up cycle, and that informs our approach to capacity planning and expansion.
Your next question comes from the line of Christian Schwab from Craig-Hallum.
Congratulations, Sheri, on a well-deserved retirement. It has been a pleasure working with you for many years. My question is: as wafer starts accelerate from the added capacity that's put on, is it safe to assume that services will grow at the same pace as products or potentially even higher as we exit 2027?
I do see services growing. We have communicated double-digit growth in services previously, but OEMs always have extended service programs, so there is a timing lag. We expect double-digit services growth in 2026 and 2027, but further acceleration will depend on the ramps of advanced factories in the U.S., improvements in utilization of major customers in the U.S., and the leading-edge ramps planned in Korea and Taiwan.
There are no further questions at this time. I will now turn the call over to James Xiao for closing remarks.
Thank you, operator. We appreciate you joining us today, and we look forward to talking with some of you on follow-up calls and to updating you all after Q3.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.