Ultra Clean - Earnings Call - Q3 2025
October 28, 2025
Executive Summary
- Q3 2025 delivered modest top-line but solid quality of earnings: revenue $510.0M, non‑GAAP EPS $0.28, both above guidance midpoints and above Wall Street consensus ($505.2M revenue*, $0.22 EPS*) on stronger mix, improved site utilization, and tariff recoveries.
- Gross margins improved sequentially to 17.0% non‑GAAP (16.1% GAAP), the highest of the year, driven by mix, factory utilization, and higher tariff recovery; management now recovers “a little over 90%” of tariff costs.
- Q4 2025 guidance: revenue $480–$530M; GAAP EPS $(0.11)–$0.09; non‑GAAP EPS $0.11–$0.31. Management expects mix/utilization to revert to 1H levels, implying margins drift off Q3 highs and visibility remains limited near‑term.
- Capital allocation optionality refreshed: Board approved a new $150M, 3‑year share repurchase authorization (max $50M/yr); no near-term buybacks planned as they prioritize balance sheet and cost of capital.
- Stock catalysts: beat vs. consensus*, tariff recovery process now embedded, improving mix, and new CEO’s “UCT 3.0” strategy focused on vertical integration and operational excellence; balanced by cautious near‑term WFE visibility and offsetting demand pockets into Q4.
What Went Well and What Went Wrong
What Went Well
- Non‑GAAP gross margin reached a 2025 high of 17.0% (vs. 16.3% in Q2), supported by “improved site utilization, a higher value product mix, cost and efficiency initiatives, and tariff recoveries.” Management: “we are able to recover… a little over 90% of the tariffs”.
- Both top and bottom lines exceeded midpoints of guidance; non‑GAAP EPS rose to $0.28 (vs. $0.27 Q2), with segment margins up in Products (15.1% GM) and Services (30.0% GM).
- Strategic and operational progress under new leadership: CEO articulated “UCT 3.0” to become a “trusted strategic partner and co‑innovator,” emphasizing automation, AI-based inspection, cluster-based manufacturing, and accelerated NPI to drive long‑term profitable growth.
What Went Wrong
- GAAP profitability remains pressured: Q3 GAAP net loss $(10.9)M ( $(0.24) per diluted share) despite operational improvements, reflecting amortization, restructuring, and legal/tax items; year‑to‑date includes a goodwill impairment taken in Q2.
- Near‑term visibility is reduced and Q4 revenue guide midpoint is slightly below Q3; mix expected to revert toward 1H levels, tempering margin gains despite captured European wins.
- Q3 cash flow dynamics softer sequentially: management cited breakeven operating cash flow in the quarter (vs. $29.2M in Q2) due to timing, even as 9‑month operating cash flow improved year‑over‑year to $57.5M.
Transcript
Speaker 7
Ladies and gentlemen, welcome to the UCT Q3 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 *0 for the operator. 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, and Investor Relations. Please go ahead.
Speaker 8
Thank you, operator. Good afternoon, everyone, and thank you for joining us. With me today are Clarence Granger, Chairman; James Zhao, 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, 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.
With that, I would like to turn the call over to Clarence. Clarence?
Speaker 2
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 three 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 Zhao, UCT's new CEO, for a few observations from his first 60 days and insight into UCT's next phase of growth. 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 margins, 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 remained focused on strengthening our operational foundation through the three 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 is 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 strengths: 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?
Speaker 1
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 the 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 roadmaps. 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 improvements 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 round. 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 the leading edge node, and further strengthening our strategic partnerships with semicap 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 sentiment 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.
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?
Speaker 4
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 three-year term, authorizing up to $150 million in 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 localize the 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. With that, I'd like to turn the call over to the operator for questions.
Speaker 7
Thank you, ladies and gentlemen. We will now begin the question-and-answer session. Should you have a question, please press the star followed by the one on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Charles Shi of Needham and Company. Please go ahead.
Speaker 0
Thanks for taking my question. Good afternoon, Clarence and James, Sheri. Maybe the first question on the near-term industry demand outlook looks like you guys are seeing maybe we won't really see a pickup over the next "several quarters" before an actual pickup starts to happen. I wonder what your view right now on the first half next year is. Should we still kind of assume that the $500 million per quarter level? What's the early view on the second half next year? That's the first question. Thank you.
Yeah. Okay. Charles, thanks for the question, and I look forward to working 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, 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 a little bit of a flattish outlook in the first half, and they see a kind of a step function increase in the second half. Others see it differently. I really do not want to give you a specific because of the controversial outlook we have from different customers. I would say that we will see a mid to high range in year-over-year growth, and the timing of that to be seen.
Got it.
Sheri wants to maybe.
Speaker 4
Go ahead, Charles.
Go ahead, Charles.
Speaker 0
Yeah. Maybe a second question on Q4. It looks like you are 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. 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? Thank you.
Speaker 10
Hi, Charles. This is Sheri. Yeah, we did. We have seen that demand and continuing to see that, we are seeing some different forecasts from other customers. It's just causing a little bit of difference in Q4 than what we initially said last quarter. 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, it just happened to be a little bit better mix than what we've seen previously. Q4 is kind of going back to the mix that we've seen in the first half of 2025. That's generally why our Q4 is slightly down from the Q3 timeframe.
Speaker 2
Charles, this is Clarence. 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 business is slowing down and offsetting that. 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.
Speaker 0
Got it. If I may, I have one last question. 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 were 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 it on track to recover, and is it on track into the, let's say, into the fourth quarter, or where do you see that China for China business in terms of maybe revenue run rate, where it's going to be at? Thank you.
Speaker 2
Hey, Charles. Yeah, 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. I guess it's my turn. 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. 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. In terms of the revenue, our revenue this quarter and next quarter will be about the same percentage for China. It's relatively flat right now. Frankly, because of all the political turmoil, we are migrating all of our non-Chinese customer manufacturing out of China. As you know, we've called that China for China, but we're probably going to quit using that terminology.
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. That's an important strategic direction for us, and we've accomplished what we said we would. From a 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 two separate manufacturing organizations. That's it.
Speaker 0
Thank you. I appreciate all the color. Thank you.
Speaker 2
You're welcome. You're welcome.
Speaker 7
Your next question comes from Krish Sankar of TD Cowen. Please go ahead.
Speaker 5
Hello. 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.
Speaker 2
By the way, just my first question. 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'd mentioned integrating the Fluid Solutions systems into existing products. Are those targets still on track? I have one follow-up. Sure. Obviously, we've talked about the acquisitions. We had Fluid Solutions, Services, and HIS. 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 give us consistency between our traditional UCT manufacturing and our Fluid Solutions. We've also completed the strategic alignment between the products group and Fluid Solutions on qualification priorities with our customers. We've made very good progress there.
The reason we need strategic alignment is the Fluid Solutions products will be utilized in the subsystems that our products groups build. We won't actually see, as Fluid Solutions gets more and more qualified, 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. That will result in improved margins for us. We're very pleased with the progress that we've made there. The other two sites are the Services site, and we've made some good progress on the integration of the Services site. 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.
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. 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.
Speaker 5
Great. Thank you. That's helpful. For the tariff recovery benefit in the quarter, was that meaningful to the overall margin growth in the September quarter? Was this sort of a one-time benefit catch-up from suppliers, or should we expect a bit of a tailwind in the December quarter as well?
Speaker 10
Yeah. 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. We anticipate we have put a really good process in place for go forward now, and that basically will assist us with that collection as we move forward.
Speaker 2
I guess the other point I'd like to make on that, we're now to the point where we're very confident. First of all, this was not a one-time hit. This is ongoing. We're 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. This should be less of a factor to us on a go-forward basis.
Speaker 5
Got it. Thank you.
Speaker 10
Thank you.
Speaker 7
The next question comes from Christian Schwab of Craig Hallum. Please go ahead.
Thanks for taking my question. 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. That being said, do you think the company is positioned, you know, to outgrow WFE growth in calendar 2026, 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?
Speaker 1
Hi, Christian. This is James. Nice to meet you virtually. I think that, as I mentioned, the '26 is really a kind of 5% to 8% year-over-year growth, depending on which analyst you're looking at. From the UCT perspective, it's hard for us to give you a concrete forecast on how much is our year-over-year growth for the following reasons. Number one is that we still see some of the customers still have inventory. The consumption of inventory actually kind of delays the revenue from a UCT perspective, right? 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.
Therefore, you probably see them have this incremental revenue where the UCT revenue growth from the NPI product will be a few quarters behind. Therefore, we cannot fully capture the NPI growth. The third is really the product mix. If you look at the leading-edge spending, you can see that the list is more than 40% of the spending. UCT historically is really edge and that intensive. With that said, we're working very closely with our third customer, which is a lesser company, and grow our revenue with them. I think that the longer term, you will see that we're more kind of matching the WFE growth when we grow that lesser business. Finally, this also goes to the China factor, right? The domestic OEMs in China, depending on the analyst report you follow, could be increasing percentages of the worldwide WFE growth.
UCT does not necessarily have the same market share as we have in 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.
Great. Thank you. No other questions.
Thank you.
Speaker 7
Your last question comes from Edward Yang of Oppenheimer. Please go ahead.
Speaker 9
Hi folks. Thanks for the time and welcome aboard, James. Can we just close a 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. What are you seeing specifically in your order book? I 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?
Speaker 10
Hi, Ed. This is Cheryl. I'll start with the industry view and then let James talk a little bit more in terms of some of the products. When we look out at the industry, we do have a number of the companies and third parties who are indicating second half should be positive. There are a lot of things that are going in on that. 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. There are at least two of our customers who are looking at flat revenue, flat to up, others who are still forecasting significant gains or opportunities, all on the second half. We've had two or three or four years of saying second half growth.
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. We just want to remain cautious about how we're looking at it and how we structure things.
Speaker 1
I think that the only thing I want to add is that, you know, it's really the business nature. I live in both worlds, at the semicap OEMs and now with a subsystem company like UCT. I see the visibility is a little bit different. You know, the other side is about six to nine months, if you will. Here is really a quarter plus, I'd say. Therefore, there is a visibility kind of difference. 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.
Speaker 9
Okay. That's helpful. James, 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? We'd love to get your thoughts there.
Speaker 1
I think that those are 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? 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, you know, we continue to drive the cost efficiency, right? That's really my first priority. I think that the growth really, it's always follow that, you know, horizon one, two, three cadence. I always want to focus on the horizon one, which is really expand the business with our partners in the OEM space. The top three customers are definitely our focus.
We can look at, you know, the diversification in that space means that some of the other semicap OEMs, I really want to continue the vertical integration that Jim and Clarence already did in the past five years. Integration is part of that, but we can further expand the engineer product as long as it fits our core competency and also fits in the vertical integration strategy we have. Finally, as a horizon two or three, we can look at all the areas you mentioned. 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.
Speaker 9
I look forward to that. Thank you very much.
Speaker 1
Thank you.
Speaker 7
There are no further questions at this time. I will now turn the call over to James Zhao for the closing remark. Please continue.
Speaker 1
Thank you for joining us for this earnings call. I look forward to further chat with you at the follow-up calls.
Speaker 10
Yep.
Speaker 1
Thank you.
Speaker 7
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.