Participants

Rhonda Bennetto; Investor Relations; Ultra Clean Holdings Inc

Clarence Granger; Interim Chief Executive Officer; Ultra Clean Holdings Inc

Sheri Savage; Chief Financial Officer; Ultra Clean Holdings Inc

Cheryl Knepfler; Vice President, Marketing; Ultra Clean Holdings Inc

Charles Shi; Analyst; Needham & Company Inc.

Robert Mertens; Analyst; TD Cowen

Christian Schwab; Analyst; Craig Hallum

Edward Yang; Analyst; Oppenheimer & Co., Inc.

Presentation

Operator

Good afternoon, ladies and gentlemen, and welcome to the UCT reports Q1 2025 financial results conference call. (Operator Instructions)
This call is being recorded on Monday, April 28, 2025. I would now like to turn the conference over to Rhonda Bennetto, Investor Relations. Please go ahead.

Rhonda Bennetto

Thank you, operator. Good afternoon, everyone, and thank you for joining us. With me today are Clarence Granger, Interim CEO; Sheri Savage, Chief Financial Officer; and Cheryl Knepfler, our VP of Marketing. Clarence will begin with some prepared remarks about the business, and Sheri will follow that with the 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. The 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 Clarence. Clarence.

Clarence Granger

Thank you, Rhonda. And good afternoon, everyone. We appreciate you joining our first-quarter 2025 conference call.
I'll start with a brief review of our financial and operating results, followed by some commentary on the near and yet longer-term semi-market landscape. I'll also highlight some opportunities we're pursuing, and then I'll turn the call over to Sheri for a more detailed financial discussion.
First of all, due to some pushouts in demand from our customers and some shipment delays due to technical challenges that our customers had with their customers, we missed the midpoint of our revenue guidance range by about $12 million. While we are disappointed by this myth, it was not caused by any performance issues or customer issues on UCT's part.
Going forward, as you all know, the global reciprocal tariff war has disrupted nearly every industry and supply chain in every market around the world. Companies in all industries are having to assess where their existing inventory is, what US bound inventory they may want to ship or hold, and what alternative markets may be available for their products.
On the upside, chipmakers are likely to continue positioning for future demand by adding critical capacity and completing ongoing no transition at key FA. This supports our belief that $1 trillion in ship revenue by 2030 remains likely. However, the timing of the broader capital expenditure required to reach that goal is uncertain.
Just like our customers and their customers, we are actively monitoring the geopolitical landscape and will make the necessary adjustments to our business to maximize efficiency. We can't predict how long this period of uncertainty will last. What we are presuming is that the already slower semiconductor market recovery that became apparent earlier this year will be extended.
As you saw from our Q2 guidance, we are factoring in a modest decline in demand for the June quarter. And based on what we know today, we anticipate bouncing around these revenue levels for the remainder of this year. With this in mind, we are focusing internally on how we can improve our business performance.
Over the last several years, we have made multiple acquisitions that have added to UCT's capabilities. And while these operations have performed well, we have not had the time to fully optimize them. We will now focus on doing that.
Also, with our history of growing faster than the semiconductor equipment industry as a whole, we had anticipated being well on our way to a $4 billion run rate by this time. However, given the length of the current industry downturn, we are presently at a $2 billion run rate.
We are now going to look at all of our business systems and cost structures and scale them to our current volumes. This will include facilities, people, equipment, and discretionary expenses. At the same time, we will continue to work closely with our customers' engineering teams to qualify new products and new vertically integrated components.
UCT is in a relatively strong position given all the geopolitical uncertainties. To mitigate future supply chain disruptions post COVID, we initiated a localized supply chain strategy. We reconfigured our procurement and qualification processes to ensure faster market responsiveness and enhanced resilience by securing reliable local supply sources for our global sites.
These initiatives included sourcing key components within the Asia Pacific region to continue to support our local Chinese OEM customers. At the same time, we strategically invested in capacity and operational efficiencies at other global sites to maximize profitability as utilization increases with demand.
Despite all the tariff distractions, our teams remain focused on what really matters to us, seamless collaboration with our customers. By identifying opportunities and designing solutions for the most challenging technology road maps. We continue to advance several opportunities in products and services that will create significant value over the long term.
For instance, we have tripled our portfolio in lithography and continue to see incremental share gain at our third largest customer. Another exciting area where we hold a unique competitive advantage over the long term is in the sub fab space where our engagement with our customers has expanded to include on-site engineering support.
One other encouraging development is the accelerated ramp of the Arizona Fab, owned by the world's largest chipmaker, that is scaling up twice as fast as originally planned. This benefits our services business. We expect all these initiatives will gain momentum once economies of scale kick in commensurate with a market recovery, enhancing our leadership position as the manufacturer of choice for our customers.
In summary, before I turn the call over to Sheri, we expect greater clarity to emerge in the coming months and we'll closely continue to monitor potential impacts for us and our customers. Meanwhile, we will focus on managing our business in a very disciplined manner. We remain focused on the core strengths of our business, including technology leadership, manufacturing excellence, and customer trust.
As we work to further reinforce our competitive position. it's important to keep in mind that despite ongoing uncertainty from tariffs and the cyclical nature of the semiconductor industry. The industry has consistently outperformed other markets over the long term.
The industry outlook remains highly promising, with semiconductors serving as essential enablers of numerous transformative megatrends. We believe that UCT will again outpace the market and drive increased earnings as top line growth recovers.
And with that, I'll now turn the call over to Sheri.

Sheri Savage

Thanks, Clarence, and good afternoon, everyone. Thanks for joining us. In today's discussion, I will be referring to non-GAAP numbers only.
As Clarence has noted, we saw a softening of demand for our product business unit late in the quarter. We are focusing internally on positioning ourselves from a cost perspective for the environment we are in. That means we are reviewing our headcount, our organizational structure, and our footprint, and we are further optimizing our acquisitions that we've made over the last several years. This will allow us to adjust our cost structure accordingly to protect profitability as we move through 2025 and beyond.
For the first quarter, total revenue came in at $518.6 million, compared to $553.3 million in the prior quarter. Revenue from products was $457 million, compared to $503.5 million last quarter due to weakening demand late in the quarter. Our services business at a good quarter with revenues increasing from $59.8 million in Q4 to $61.6 million in Q1, primarily from two of their top customers.
Total gross margin for the first quarter was 16.7% compared to 16.8% last quarter. Products gross margin was 14.9% compared to 15.2% in Q4, and services remained flat at 29.8%. 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.
Given the uncertainties surrounding Paris, we remain focused on execution and we are ready to react quickly to any new trade regulations. Operating expense for the quarter was $59.4 million compared to $55.3 million in Q4. As a percentage of revenue, operating expenses were 11.5% versus 9.8% in Q4 due to lower volumes and increased expenses. Q1 operating expenses are typically higher due to an increase in year-end activities such as audit-related costs.
As I noted earlier in my comments, we have instituted cost saving measures that we expect will reduce our operating expense run rate as we move through the year. Total operating margins for the quarter came in at 5.2% compared to 7.7% last quarter. Margin from our products division was 4.6% compared to 6.6%. And services margin was 10.2% compared to 9.7% in the prior quarter. The overall margin decrease for products was primarily driven by lower volumes.
Our tax rate was 20% for this quarter compared to 14.5% last quarter. Our mix of earnings between higher- and lower-tax jurisdictions can cause our rate to fluctuate throughout the year. For 2025, we expect our tax rate to be in the low- to mid-20s. Based on 45.4 million shares outstanding, earnings per share for the quarter were $0.28 on net income of $12.7 million compared to $0.51 on net income of $22.9 million in the prior quarter, primarily due to lower revenue and higher operating expenses.
Turning to the balance sheet, our cash and cash equivalents worth $317.6 million compared to $313.9 million in the end of the last quarter. Cash flow from operations was $28.2 million compared to $17.1 million in the last quarter, mostly due to working capital efficiency and tight inventory control.
Subsequent to quarter end, we repurchased 182,000 shares at a cost of $3.4 million as part of our repurchase program. The tariff situation remains very fluid. We are actively monitoring the geopolitical landscape and we'll make the necessary adjustments to our business to maximize efficiency and protect profitability.
Given the heightened uncertainty within the semiconductor market at this time, we project total revenue for the second quarter of 2025 to be between $475 million and $525 million. We expect EPS in the range of $0.17 to $0.37.
And with that I'd like to turn the call over to the operator for questions.

Question and Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session.(Operator Instructions)
Charles Shi, Needham.

Charles Shi

Hi, Clarence. Sheri, good afternoon. I want to start with the first question. I want to learn a little bit more about what exactly happened, what exactly you were seeing when you said the softening demand late into the quarter. I want to provide a couple of numbers I saw from the press release or the PowerPoint. It looks to me that the revenue actually coming from the largest customer was flat quarter on quarter.
And the second largest cost may be down a little bit, but not to the same degree as, what we saw on the top line. So one the way back to the weakness that you are seeing, and maybe this is maybe related, what, what's the China revenue number, or percentage, for the March quarter. Thank you.

Clarence Granger

Well, that's a lot of questions. First of all, let me talk about the softening demand that we saw in Q1.
What we really, obviously we are already guided down based on what we thought was going to happen in the quarter. Some of it was related to our Asian customers, some of our other customers, but we actually missed the midpoint of the guidance by about $12 million.
But literally that was related to two customers. One of those customers was an Asian customer and the other customer was a European customer, and the situation with those two customers literally, they had a technical issue with their customers which caused us not to be able to ship. And so that's how we ended up missing our Q1 guidance by roughly $12 million in terms of the China overall. It's obviously it's a complicated situation and it's evolving constantly, but what I would say is that at this point in time.
We are anticipating actually a slight revenue increase in Q2, and we anticipate further revenue increases in the second half of the year. So we're starting to feel like our China situation is solidifying. Definitely our China-for-China strategy is working very well, so we're very happy with that. And then I'm trying to remember what was your other question, Charles?

Charles Shi

So I think the way you answer the question, you actually covered most of the part of my question. So maybe a quick follow up. What in March quarter, what's the China revenue percentage or China revenue on a dollar basis? Is that something you can provide on this call?

Clarence Granger

My CFO is waving at me furiously that I'm not supposed to say a number.

Charles Shi

Okay. We'll wait for that.

Clarence Granger

Thank you. What can we say, Sheri?

Sheri Savage

Yeah, we don't have a specific percentage for you, Charles. So it's going up slightly quarter over quarter, and we see it continuing to grow in the second half. So we'll provide further guidance when we have that.

Clarence Granger

We certainly don't provide guidance out any further than one quarter.

Charles Shi

Yeah, absolutely. So maybe a second question, I do want to ask since you mentioned that this softening customer demand late in the quarter, but you also guided on June and beyond June, you actually said you think you're going to be bouncing around, the June quarter level, but it feels like some of the stuff you, the some of the weakness you are seeing. You consider that as going to have a longer-term impact and not just a one quarter phenomenon. Want to ask you.
Are any customer behavior change that make you think it's going to be a multi-quarter impact or is there anything else that leads you to make this call that we should not be expecting. The stronger second half, for example, right, for your business or any recovery from the current level in the near term, hopefully that that question is clear, yeah.

Clarence Granger

Yeah, I think it's fairly clear, Charles. So from my perspective, obviously there's a lot of uncertainty going on in the market right now, so we're pretty comfortable that there isn't going to be any dramatic downturn from this point, but there might be a minor downturn is at least what we're seeing right now.
And that's kind of why we said it's going to be bouncing around the $500 million per quarter range, but there's clearly a lot of uncertainty in the market right now and I'm going to let Cheryl address that. So Cheryl, if you want to talk about that a little bit, appreciate it.

Cheryl Knepfler

Yeah, I mean, a number of the customers and other folks have already talked about the fact that they are seeing a little bit of softness in the second half prior to anything related to tariffs or anything else.
So what we're seeing is and saying is a reflection of that, so obviously, the level to which and things that we're forecasting, we just don't have the visibility beyond what is being said and what's being communicated to us to do that so we had indicated that we expected some level of decline for a period and it's just looking to extend a bit.

Charles Shi

Got it. Maybe a last question from me. There's, this 90-day pause for tariffs, but we're basically looking at, maybe by early July, some of the tariffs are going to go up and have you guys done any like scenario analysis to see how that's going to impact the business one way or the other, and, if there's any conclusion, or any view on that, can you share with us? And so, we do want to know what kind of impact that can be from the tariffs, at least from the profitability standpoint.

Clarence Granger

Yeah, Charles, obviously that's a very good question. Obviously and equally obviously, we have been very focused on this in the last month heavily. We have a dedicated team working on what this potential impact could be, how it will affect us, how it will affect our customers. We're obviously working very closely with our customers already and trying to understand. What the impact is, and of course, the variability from day to day makes it harder to figure out.
But I can tell you a few things. First of all, one of the things that from a positive standpoint, we've been talking about China-for-China for over a year now, and really what's going to happen for us relative to China to China by the middle to the end of the third quarter, all of the products that we are manufacturing in China.
Will be for China, so we won't be manufacturing any products in China and sending them to the United States, nor vice versa. And so as a consequence of that, just we've been fortunate that we've been working on this China-for-China strategy for a long time. So there should be almost no impact to us from the China, counter tariff wars. On the other products. Again, we have a pretty good handle on what the potential impact would be.
We have a dollar number, but we're not comfortable really sharing that dollar number. But what I would say is that obviously there's multiple situations here where we're using. Components in the United States that are coming from outside of the United States that will be sold to our customers that will have a tariff effecting on them and products going outside the United States. So we have different areas where we can be hit by tariffs.
But what we identified of the total tariffs that could potentially impact us more than half, much more than 50%. Are associated with components that have been specified by our customers. So if our customers aren't comfortable changing those components that we're using from outside of the US, we will pass those charges on to the customers and they're aware of that. There's also fairly significant situations where we might be able to use alternative suppliers.
So we're pretty confident in our customer. We're working with our customers on things like free trade zones and how we can work with that to mitigate any potential tariffs in any in any sense, we're pretty comfortable that whatever tariffs that we end up being hit with in the long range is going to be fairly minimal and certainly won't be a material effect on our business.
So I guess the biggest challenge for us is going to be data collection and controls, record keeping, because obviously we'll have to keep track of all the tariffs, how much is specified by the customer, charging that back to the customer, finding other ways to mitigate the tariffs, but in any case, for the long term. As complicated and difficult as these may be, we don't anticipate this to be hugely adversely effective, impacting, our financial results.

Charles Shi

Thank you. I'll be back on the queue.

Clarence Granger

Okay.

Operator

Krish Sankar, TD Cowen.

Robert Mertens

Hello, this is Robert Mertens on for Chris Sankar. Thank you for taking my questions.
So I think previously you had mentioned some headwinds in your, domestic China semicon business arising in the December quarter of last year and initially expected to sort of decline this quarter and maybe a bit softer in Q2. Could you provide any more color into the outlook through the year? I know the largest contributor was customer specific.
Is that still the case or is there any way to sort of, quantify how your view is for the overall demand in the region or sort of the inventory, potentially inventory overhang in that area, how that could affect the second half of this year, and then I have one more follow up.

Clarence Granger

Sure. So, let me try and do my best I can on China. So first of all, we said that the situation was slowing down in China in Q1. And so we already anticipated that and shared that with you. In addition to that, I said that of the $12 million shortfall, roughly half of that was associated with another a customer in China who was unable to ship because of a technical issues that they had with one of their customers. \
And then in addition to that, what we're trying to say is that our Q2 numbers without giving a specific number, are going to be up a little bit from our Q1 numbers and we're feeling pretty confident now that Q2, I mean Q3 and Q4 should be some slight recovery in China from going forward. Did that answer?

Robert Mertens

That that's helpful. And just in terms of the China-for-China business, could you provide any color in in terms of maybe what their customers' technical delays may have been related to or if you have any idea of how those memory or foundry or anything like that would be helpful.

Clarence Granger

Yeah, we really don't want to talk about technical issues that our customers had. So in terms of what products that we serve in Asia, can you answer anything there?

Cheryl Knepfler

So when we look at the overall, obviously there are a number of, both NAN, DRAM, and Foundry, all of which are looking at replacements of other technologies because of limitations, so we expect it to be distributed across that as they go forward. So exactly which would be there as the current challenge, we are not certain.
But we do expect it to be at their largest opportunities are going to be at the three largest vendors in China and so we expect when things are cleared up and going forward that the once they have cleared any issues they have, the level of demand should be substantial and would look at addressing the inventory that was built because that would be why they built that level of inventory to meet an expected large demand.

Clarence Granger

We do want to be a little, yeah, one of the things though, I do want to be a little careful on overstating. I mean we are all obviously everybody's very concerned about China and what the implications are, but China is less than a 10% customer to us overall.
So we're roughly a 10% customer to us overall. So anyhow, I do want to keep things in perspective, although we're very comfortable with our situation in China.

Robert Mertens

Okay. And then just one last one, if I can squeeze in for that business, and you're expecting it to improve a little bit, this next quarter and hopefully, incrementally improve through the second half of this year. Do you have any sense of what impact, potential export controls could have on that business? I know it's locally sourced, but if you have any way to view what may happen if export controls tightened, even company specific for those domestic suppliers, thank you.

Clarence Granger

Yeah, boy, that's hard to predict, but from our perspective, it's likely to have no impact because our Chinese customers are, that we're shipping to in China is 100% for China. Obviously, there are some US customers that may be impacted by restrictions on what they can and can't ship into China. But that isn't what we're talking about here. What we're talking about is our China customers in China and making those products in China for them.

Robert Mertens

Got it. All right, well thank you for letting me ask this question.

Clarence Granger

Sure.

Operator

Christian Schwab, Craig Hallum.

Christian Schwab

Can you elaborate on the cost reduction plans, headcounts, and people and in the commentary earlier in the prepared comments about positioning the size of the company to a $2 billion run rate. So should we assume OpEx in the second half of the year gets on a yearly run rate of, say $190 billion to $200 billion. Is that roughly the right math or how should we be thinking about that?

Sheri Savage

Yeah, Christian, we're looking at just about everything. I mean headcount is obviously a Headcounts and footprint are probably your two largest expenses in the company, so those are the two things that we're actually looking at along with just our overall org structure. We're looking both in COGS and OE but really concentrating on the OE side as well.
I don't want to give you a specific number at this point because it's kind of an ongoing, analysis right now, but we've already went underway. Some headcount reductions and we'll continue to look at that as we move through the year, but really the footprint, I mean, obviously we had a certain level of footprint that allowed us to be at potentially a $4 billion run rate and we're really looking at optimizing that to bring it to the point that we get as much efficiency out of that footprint as possible, assuming that, things will grow eventually, but it's going to take a little bit longer than we expected.
And really looking at discretionary spending as well, so we're kind of looking everywhere you'll see those plans kind of fall out as we move through, the next quarter or two, but it's already kind of started and we're really, underway and you'll start to see those benefits, as you can tell from our guidance, we're down on revenue and the EPS is only slightly down, and that's because we've already started some of those cost initiatives.

Christian Schwab

Okay, and then on the OpEx, if you guys get to a level, I mean, is that like an announceable event like a 10% of workforce reduction or is this going to kind of be dripped out over multiple quarters?

Sheri Savage

We are not at a point where it's announceable luckily, but we will continue to look at that and see if there's anything obviously if it's necessary to be announceable we will make that so, but we're not at that point.

Christian Schwab

Okay, and I think I, wrote it down, but any tariff cost your customers are already prepared that you'll pass that on to them is did I hear that correctly?

Clarence Granger

Yeah, Christian, this is Clarence.
Nobody's prepared to accept additional cost. We're all going to figure out what we can do to resolve it, but yes, from our perspective, all of the costs, not all of the costs, but a significant portion of the cost related to the tariffs are subcomponents that have been specified by our customers and in that particular case. They will, they understand that they're obligated to the cost associated with that, so we will immediately pass those on as they occur.
The next would be stuff that we might have some control over, but We will work very closely with our customers on that already to see if we can change sources of supply or if we can work with them. One of our customers, one of our larger customers, is talking about potentially utilizing some free trade zones. So there's a lot of stuff being discussed about what would be the long-term situation, but our expectation is that any cost to us is likely to be relatively small, and we feel very manageable. So yeah, we're pretty comfortable with that.

Christian Schwab

Great. And then my last question, and the few comments we talked about pushouts and technology challenges, but it seems that in answering the questions that it was really technology challenges by two customers and customers that caused the delay in fulfilling orders or pushing them out. You didn't see pushouts above and beyond the technology challenges of the two customers, or did you?

Clarence Granger

No, you are correct. We really didn't see any significant push out towards the end of the quarter for the customers, so obviously we're very leery and we've guided down a little bit this quarter because of all the uncertainty, but the tariffs didn't occur until the beginning of this quarter, so, and obviously there's a lot of Just a lot of general confusion about what's going on in the marketplace, and we think that there's likely to be some slowdown just because of the nervousness. Cheryl, do you want to add on to that or?

Cheryl Knepfler

Yeah, so obviously all of our customers, all of the end customers will position for the long term demand how that needs to play out because everyone is looking at the long-term requirements needed to support $1 trillion by the 2030 and ships by the 2030 time frame, so we do think that that is the overall driver for the industry. We are just going to be cautious on looking at that with the understanding that everyone is putting forward the comments on based on what we know at this time.
So at this point based on what we know at this time, we think that we need to be a little bit more cautious in terms of our outlook, and that's what we're indicating since we are further down on the chain and we've indicated that, our customers may have some inventory. There's a number of things happening that are outside of our control that we just don't have as much visibility on. And so we are looking and sizing and working towards a little bit more cautiousness.

Christian Schwab

Great, got it. Thank you. No other questions.

Clarence Granger

You're welcome.

Operator

Edward Yang, Oppenheimer.

Edward Yang

Okay, thank you. Clarence, I mean, just a lot of puts and takes going on. Would you be able to just give us an updated view on WFE growth for 2025?

Clarence Granger

I'm going to -- I'm not going to touch that. I'll let Cheryl deal with that.

Cheryl Knepfler

So as we look at 2025, as a starting point, I think 2024 came in a little bit higher than what had been forecasted before the third parties made their announcements around that. So at this point, I don't think anyone is in a position they're going to increase the forecast for 2025.
So even with that we were looking at about a 2% to 3% year-over-year increase. I think with the uncertainty in the market, it is unlikely that that is going to grow. In fact, Intel announced that they were looking at about a $2 billion reduction in their CapEx. Obviously, part of that was going into buildings but not necessarily equipment. But I do think that everyone is going to be looking at that, and there is more downside risk than upside opportunity, and that's what we're looking at sizing for.
So I think everyone would be relatively thrilled if it ends up at the $100 billion that Lamb indicated and so that we certainly see that as an opportunity, but we do not know if that is where things will end up.

Edward Yang

Got it. In your business, have you seen any pull-ins or front loading of demand related to tariffs? And I only bring this up because, you hear about retailers that stocked up on inventory, consumers panic buying iPhones ahead of tariffs. Have you seen any direct front loading on your end or do you think there have been some secondary, impacts from that that could potentially affect future pushouts or shipment delays outside of the technical qualification issues that you mentioned earlier.

Clarence Granger

Yeah, this is Clarence, I don't really think so. I don't feel it if there are any are any pull-ins or anything associated with, timing and on all the tariffs. They feel relatively small to us at this point in time, so I don't think that's, obviously if you were buying some clothing from Asia, you'd probably be really concerned about that, but we're not in that kind of a situation and I don't see anything that might be similar to that.

Edward Yang

Okay and then just finally just an update on the CEO search.

Clarence Granger

Yeah, so I was wondering if anybody was going to ask that. So, I'm sneaking up on two months now. What we said is it should take about six months. We have hired a search firm and they told us it's likely to be three or four more months in the process. So I think my original six-months timing, sounds pretty good, so I'm going to stick with that.

Edward Yang

Thank you.

Clarence Granger

Yeah, thank you, guys.

Operator

There are no further questions at this time. That concludes our question-and-answer session. I'd like to turn the conference back to Mr. Granger for closing remarks.

Clarence Granger

Well, thank you, operator, and thanks, everybody, for joining us on this call. We look forward to speaking to you again in our next quarterly call. Thank you.

Operator

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