Ultra Clean - Earnings Call - Q2 2025
July 28, 2025
Executive Summary
- Revenue of $518.8M beat Wall Street consensus of ~$500.8M; non-GAAP EPS of $0.27 matched consensus, while GAAP EPS of $(3.58) reflected a $151.1M goodwill impairment charge. Q2 2025 consensus: revenue ~$500.8M*, EPS $0.27*; actual: revenue $518.8M, EPS $0.27.
- Segment mix remained stable: Products $454.9M and Services $63.9M; non-GAAP gross margin 16.3% and operating margin 5.5% improved slightly versus Q1 (16.7%, 5.2%) on OpEx reductions.
- Q3 outlook: revenue $480–$530M; GAAP diluted loss per share $(0.09)–$(0.29); non-GAAP diluted EPS $0.14–$0.34; management signaled cost actions and new business wins (Czech) support an upward bias into Q4.
- China revenue stepped up to ~$35M (vs ~$21M in Q1) and is tracking toward a $40–$50M quarterly run-rate; tariff reimbursement delays and ~$2–$3M annual admin costs remain a near-term risk.
What Went Well and What Went Wrong
What Went Well
- Revenue beat consensus with stable mix and Services strength; non-GAAP operating margin rose to 5.5% from 5.2% on lower OpEx: “our actions to reduce operating expenses are well underway”.
- Clear internal execution priorities: “NPI and component qualifications,” “flattening the organization,” and “business systems and final integration” to drive efficiencies and margin uplift (Fluid Solutions qualifications to enhance margin in early 2026).
- China-for-China strategy gaining traction: $35M Q2 revenue (vs $21M Q1), management targets $40–$50M per quarter and notes multi-decade customer ties supporting continuity.
What Went Wrong
- Large GAAP loss driven by non-cash goodwill impairment ($151.1M), lowering reported gross-to-operating margins and EPS despite steady non-GAAP performance.
- Tariff reimbursements from major customers are slow; UCT incurred ~$0.5M in Q2 with ~$3M of charges tied to customer-specified components, plus ~$2–$3M annual admin burden to process reimbursements/documentation.
- Visibility remains limited; management expects to “bounce around” ~$500M per quarter near term as broader WFE recovery timing is pushed out amid tariff and macro uncertainty.
Transcript
Operator (participant)
Good afternoon, ladies and gentlemen, and welcome to the Ultra Clean Technology Reports Q2 2025 Financial Results conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Monday, July 28, 2025. I would now like to turn the conference over to Ms. Rhonda Bennetto of Investor Relations. Thank you. Please go ahead.
Rhonda Bennetto (SVP or Investor Relations)
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. 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.
Please.
A reconciliation of GAAP to non-GAAP.
Can be found in today's press release posted on our website.
With that, I'd like to turn the call over to Clarence.
Clarence.
Clarence Granger (Chairman and Interim CEO)
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 three 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 three 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 reduction 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've 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 improved 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. 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 said provide, 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. 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 roadmaps with agility and precision. With that, I'll turn the call over to Sheri.
Sheri Savage (CFO)
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, seeing 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 $53.9 million in Q2. Total gross margin for the second quarter was 16.3% compared to 15.7% 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.
Rhonda Bennetto (SVP or Investor Relations)
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 a range of $0.14 to $0.34, and with that, I'd like to turn the call over to the operator for questions.
Operator (participant)
Thank you, ladies and gentlemen. We will now begin the question-and-answer session. Should you have a question, please press star followed by the one on your telephone keypad. You will hear a prompt that your hand has been raised, and should you wish to cancel your request, please press star followed by the two. If you're using your speakerphone, please lift the handset before pressing any keys. One moment, please. Your first question comes from the line of Charles Shi from Needham. Please go ahead.
Charles Shi (Senior Analyst)
Hi.
Thanks for taking my questions.
Clarence, Sheri, maybe the first one.
I think you probably didn't address the Q2 revenue.
One went a little bit above the midpoint of your Q2 guidance.
Mind if you kind of walk us.
What was the upside there in Q2?
Clarence Granger (Chairman and Interim CEO)
We had a little bit of upside from China that was helpful. 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.
Charles Shi (Senior Analyst)
Got it. To follow up on the China business, 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?
Clarence Granger (Chairman and Interim CEO)
Yeah.
Again, this is Clarence. Yes, that is true. 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. It's not huge. I will give you the numbers. The numbers in Q1 were about $21 million, and in Q2 they were about $35 million. It's a significant increase. We've said that we expect, on an ongoing basis, in China, our China-for-China strategy to be running about $40 to $50 million a quarter with revenue out of our Chinese-based customers. It feels like we're pretty close to being where we thought we would be at this time.
Charles Shi (Senior Analyst)
Thanks, Clarence, for the extra color there. Maybe I ask my last question.
You said the beginning sounds like.
You are still expecting $500 million per-quarter run rate through the rest of the year. I think you also mentioned some new wins from your Czech site 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. Thank you.
Clarence Granger (Chairman and Interim CEO)
You didn't necessarily overread that. We're not in a position where we're ready to commit the Q4 numbers, but it certainly feels like there's an upward bias in Q4. We're kind of feeling pretty good about our directionality 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.
We're cautiously optimistic that the fourth quarter will get better.
Charles Shi (Senior Analyst)
Thanks, that's all for me.
Clarence Granger (Chairman and Interim CEO)
Good.
Operator (participant)
Thank you. Your next question comes from the line of Krish Sankar from TD Cowen. Please go ahead.
Krish Sankar (Managing Director and Senior Research Analyst)
That's answering my question. I had a couple of questions. Number one, thanks for the color. On China, you said it might run rate at about $35 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 semicaps that are selling into China. I'm kind of curious. Have you looked into that? Do you think there's a risk that this revenue that you're selling into Chinese semicaps could go to zero?
Clarence Granger (Chairman and Interim CEO)
Yeah, I'm going to let our analyst, market analyst Cheryl Knepfler, answer that one.
Cheryl Knepfler (VP of Marketing)
Obviously, there's always a risk that it could go forward at a different level. 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 (Managing Director and Senior Research Analyst)
Gotcha. Just to clarify, Cheryl and Clarence, $35 million last quarter, you think it's only $35 to $40 million, you think that run rate so far is sustainable, and you haven't heard anything from the government or anybody about potential caps on that?
Clarence Granger (Chairman and Interim CEO)
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. 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. 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 (Managing Director and Senior Research Analyst)
Got it. I'll add another question. You kind of said that, you know, I think China revenues are marginally better
in the second half.
I'm kind of curious, when you look into, compared to your earnings call three months ago, did the commentary from China get marginally better, or was it the same thing compared to three months ago in terms of China demand, either through AMAT and Lam or through your China semicap customers second half of this year?
Clarence Granger (Chairman and Interim CEO)
I think I mentioned this, 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 at a rate that's more in line with what we've traditionally been expecting from them.
Krish Sankar (Managing Director and Senior Research Analyst)
One follow-up to that, Clarence, I think last time you also mentioned it was one Chinese customer and also there was one European customer who had some delays, which many people assumed to be ASMI. I'm kind of curious, has that European customer issue been resolved?
Clarence Granger (Chairman and Interim CEO)
Yes, we shipped units to them as well in the quarter.
Kris Sankar (Managing Director and Senior Research Analyst)
Thank you very much, Clarence.
I really appreciate it.
Clarence Granger (Chairman and Interim CEO)
You're welcome.
Operator (participant)
Thank you. Your next question comes from the line of Christian Schwab from Craig-Hallum Capital Group. Please go ahead.
Christian Schwab (Senior Research Analyst)
Great.
Thanks for taking my question. Given the tremendous strength in AI as well as rumors of what looks to be increased investment in Samsung and 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 2026, what WFE.
Could look like yet?
Cheryl Knepfler (VP of Marketing)
As we look at the wafer fab equipment market 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. 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 Schwab (Senior Research Analyst)
Okay, so kind of in line with some of the optimist third-party research out there, kind of 8 to 12%. My follow-up question regarding that, in a situation such as that, would you expect your company to be able to outgrow WFE, you know, in a double-digit range like you have historically done it in an upturn?
Cheryl Knepfler (VP of Marketing)
We.
Certainly see the mix of products and our share gains as supporting that opportunity. Definitely going forward, the balance, most of the companies have brought in EUV, and that initial sort of disconnect that happens when a new segment brings in some of those technologies has passed for both DRAM and SoAR boundary. We expect our segments to grow with WFE, and we should be able, we expect to outperform them overall.
Christian Schwab (Senior Research Analyst)
Excellent.
No other questions.
Thank you.
Operator (participant)
Thank you. Your next question comes from the line of Edward Yang from Oppenheimer. Please go ahead.
Edward Yang (Equity Analyst)
Hi, thanks for taking my question. Clarence, you mentioned being cautiously optimistic on the 4Q, and you listed a number of different items. 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 Granger (Chairman and Interim CEO)
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 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.
Last quarter, it looked like about $500,000 in the quarter, but our customers took about $3 million, or we incurred about $3 million worth of tariff charges associated with the quarter. 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. I guess that causes us to be a little concerned, although we've gotten verbal commits from them. I forget what was the other one that you—oh, AI. Honestly, Cheryl, you know, 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.
Edward Yang (Equity Analyst)
Following up on the tariff reimbursement, is it your leading-edge customers that haven't paid you for the balance, or is it, you know, I just like to understand where the disagreement might be.
Clarence Granger (Chairman and Interim CEO)
There's no disagreement, don't get me wrong, they're just slow to pay. They're our largest customers.
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. The other downside with the darn tariffs is the costs, 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. 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.
What does that work out to be? About $0.06 a year. We could be ending up at $0.105 each quarter that we have to deal with that we're frustrated about.
Edward Yang (Equity Analyst)
That's helpful. Final question for me. I'd just like to better understand the goodwill impairment charge. You know what was driving that?
Sheri Savage (CFO)
Yeah, hi, this is Sheri. The key thing is our stock price has gone down with the overall market uncertainty, and unfortunately, with that happening, our carrying value of that goodwill on our book was lower than the market cap of the company. That's what basically triggered the accounting of that. It's purely a non-cash 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 assumptions now are a little more conservative than when we initially bought the business, when we put our goodwill calculation in place. It's really a factor of our market cap at this point.
Edward Yang (Equity Analyst)
All right, thank you for that clarification.
Sheri Savage (CFO)
Thank you.
Operator (participant)
Thank you. Your next question comes from the line of Krish Sankar from TD Cowen.
Please go ahead.
Krish Sankar (Managing Director and Senior Research Analyst)
Yeah, hi.
Thanks for making my follow-up. Two questions. 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 to $40 million in revenue you get from China's summit caps, do you worry that that could ever go to zero, or do you think realistically that is not a possibility?
Clarence Granger (Chairman and Interim CEO)
First of all, I want to make clear we don't have China tariffs because all 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. 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. I don't think we're a real threat from a technological standpoint. I don't think there's much danger of us having an issue with China.
Krish Sankar (Managing Director and Senior Research Analyst)
I mean China, I mean, satisfying. Let me rephrase the question. Do you worry about the $35 to $40 million that you sell into China semicap going to zero?
Clarence Granger (Chairman and Interim CEO)
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 (Managing Director and Senior Research Analyst)
Fair enough. Thanks for that, Clarence. One quick question. I'm just curious, in the broad base among all your customer base, U.S., China, whatever it is, how do you think the inventory situation is of your cash balance, components, etc.? Do you think they've drawn it down enough that they kind of start buying more, or do you think there's still a little bit of a lag effect purely because you still have some inventory of your components on your balance sheet?
Cheryl Knepfler (VP of Marketing)
I think there's probably a little bit.
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. We do see that happening. 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. We do see that, certainly, cleaning
up a lot more.
Obviously, everyone will periodically find a series of things stuck in a corner. I think that's kind of where we are now versus a broad amount of inventory that's sitting.
Krish Sankar (Managing Director and Senior Research Analyst)
Thank you, Clarence.
Clarence Granger (Chairman and Interim CEO)
Welcome.
Operator (participant)
Thank you. There are no further questions at this time. I will now hand the call back to Clarence Granger for any closing remarks.
Clarence Granger (Chairman and Interim CEO)
Thank you, everyone, for joining us on our call today. We look forward to seeing you again in October. Thank you.
Operator (participant)
This concludes today's call. Thank you for participating. You may all disconnect.