This is right. Yeah. All right. Good afternoon. Welcome to the 28th Annual Needham Growth Conference. My name is Charles Shi. I'm the semi-cap analyst at Needham. Joining me on the stage is Ultra Clean's CEO, Mr. James Xiao. And James, I think this is your first time here, I believe. And thank you very much for being with us today. Also, in the audience, the company representatives are also here. We got the CFO, Sherri. We got the IR, Rhonda is here. Cheryl is also here. Maybe let me start. Let me fumble through my notes here. Give me a second. Oh, it's here. So James, I think you've been the CEO for a little bit over four months.
Yes.
Yeah. Maybe it feels fair to ask you now. I mean, under your leadership, where do you see your team, let's say, three to five years? And more importantly, are there near-term objectives, like say, in one to two-year period? So both the long-term vision and some of the short-term targets that you can share with us today.
Great question. And thanks, first of all, thanks for the introduction. And it really is my pleasure to meet our long-term partner, Needham associates, and also all the fellow investors and analysts here. It's been four months with UCT. I came from a customer of UCT. We've spent 19 years there. UCT is always considered a trusted partner to Applied and other industrial peers. And really, kind of what attracts me is the people-focused culture at UCT. People that work in UCT look happier, always. And also, it's really the cost, the competitiveness, on-time delivery, and also the quality performance make UCT stand out for many years. And as a kind of BUGM in multiple segments in Applied, I really understand the customer's need, where the industry is going from the technology, and also the commercialization standpoint.
I see that UCT, with the unique positioning on this trusted partnership with the top WFE players like Lam and Applied, the global footprint with strong engineering and manufacturing capability, and also this passionate, very innovative talents, I think that UCT is well positioned to grow into a $4 billion company in the next three to five years. And that will bring us to a much higher gross margin. I'm looking at 20-plus gross margin with over 10% OEM. So that will actually create additional free cash flow so we can grow this company organically and inorganically. And my focus is going to be really on this high-margin service and engineering product portfolio. And with that, we can further vertical integrate our CM business so that we can grow both at the top line and the bottom line at the same time.
So we see a really sustainable, profitable growth trajectory for UCT. And I'm super excited about it. For the short term, I think that everybody sees the big elephant in the room. We're probably facing a super cycle of our industry in the next two to three years. So the short-term focus is really to make sure that all the factories and BUs are ready for the big ramp that's really facing us and really kind of digital transform UCT so that we are operationally more efficient and really kind of respond faster to the fast ramp from the customer. We want to further enhance our NPI capabilities so we become a co-innovator and trusted partner in the customer's NPI cycle. That will help us actually further improve our gross margin while we grow the share on the leading-edge product at the customer side.
So if you ask me, the short-term focus is really the ramp readiness, the digital transformation, and the NPI enhancement. Those are the three key strategic initiatives I aligned with my team and my board. I'm super excited that my team bought into that vision and strategy. We're really in the execution mode at this point.
Thank you, James. That's a very good overview, three to five years and the near one to two years.
Sure.
Maybe I'll start with more of a near-term first. Maybe we zoom out a little bit, start talk about WFE for a moment.
Sure.
I think 90 days ago, you had the expectation, right? WFE, maybe it's like mid-high single-digit grower in 2026, second half stronger than first half. Have you seen any changes that would cause you to feel a little bit differently about that projection? Is that outlook going up given lots of development over the last 90 days?
Yeah. I think the change is significant in the last three months. I think it surprised not only ourselves, but also our customers. I think that the short answer to your question is that, yes, we see that the WFE growth from 2025 to 2026 is in the low- to mid-teen range.
Low to mid-teen.
And we also see that because of this upturn, we see the forecast increase month by month. So we see actually more upside on that number in the second half. It really depends on probably two things. One is that how intensive this foundry logic top three rates becomes. And that will determine the intensity of the second half foundry logic investment. And also on the memory side is how much the customer's customer, the big three memory guys can pull in their investment on the Greenfield factories into the 2026, which they need based on the current demand supply. I think that what's driving this two-digit growth is really three major changes. Number one is really the foundry logic. They really see the leading-edge foundry logic customers really see the strong demand from the AI data center segment.
They actually also see that Intel and Samsung really resume their investment in the leading-edge. So TSMC actually doubled down on their multi-fab, multi-node investment. That's really the main driver. And probably really kind of can extend to 2027, starting from the second half, extend to 2027. The second big change is that we were talking about the memory. Three months ago, we were still talking about the memory customer watching the consumption of the channel inventory. That's clearly kind of consumed. And also, you see their price surge on the DRAM because of the unbalanced demand supply. So now they read that as not a noise, but a signal. They all commit a CapEx expansion for even not only the upgrade of the existing fab, but also the Greenfield investment in 2027. And also, probably you guys all heard this SK Hynix announcement.
They said the shortage will last until 2028. With that kind of confidence, they actually try to also the equipment supplier ask them to pull into 2026 so they can balance the factory load so some of the 2027 memory demand actually got pulled into the second half of 2026. That's really the additional increase we see on the second half, and third is also important, really the ease of the geopolitical tension between China and the U.S., actually resulting in a lift-off of the restrictions, BIS extension suspended for another year so those canceled demand come back to Applied, Lam, and KLA so they actually rush in to ship within the fiscal year 2026.
And also the removal of the restriction of the foreign semi company for their China fab expansion also created some new demand for the upgrade of the SK Hynix, Samsung, and TSMC fab in China.
Interesting. Interesting. That's a very good overview. James, so it sounds like it's broad-based in terms of the upside you have seen over the last three months. And I think one thing you mentioned about this leading-edge foundry logic race, I think going back three months, a lot of focus has been on memory because memory, you have observable metric, right? The memory pricing.
Correct.
But foundry logic was a little bit underappreciated. But now it looks like because of those dynamics, maybe partially, it's also coming back. So maybe let me dig a little bit deeper here because traditionally, we think about UCT in terms of the processing steps you are involved in. We tend to think about you as, okay, you're tied to etch. You're tied to deposition. Deposition is more about CVD. Yeah. Can you discuss in detail which parts of the etch and dep you do serve? I mean, we want a little bit granularity: conductor etch, dielectric etch, any opportunity for you in PVD? And what about electroplating and things like that? There has been some good engagement with customers over the last couple of years as well. Are there any other WFE categories, especially with the top two customers, you can continue to penetrate?
Yeah. Yeah. Great question. I think that if you look at our current portfolio, we actually participate in almost all the product portfolios in our top two customers. And also, we actually are growing our third biggest customer in the laser space pretty significantly in the last few years. If you zoom into the top two customers, I think that definitely in etch and deposition. We participate on the CVD, ALD. We also really have a big chunk of our business in metal deposition because today's latest generation MDT metal deposition tool actually integrates the ALD and CVD into a cluster so that we actually really try to also integrate those gas panels into one module. So we actually participate significantly in that space as well. So metal, ALD, CVD, that's really the kind of deposition place.
We also engage into some of the advanced packaging space like the ECD. We have a significant share on the ECD segment as well. On the edge side, aside for a specific dielectric player in Japan, we do not participate. We participate on all the edge and conductor and dielectric edge segment as well. Beyond that, actually, you mentioned that what other business unit we actually participate. Actually, surprisingly, for one of our big customers, actually, CMP is the number one revenue generator for us. CMP definitely is a major module we participate. We also participate on EPI and ECD, as I mentioned earlier. Also, I think that some of the very critical inflection technology like the molybdenum and also some of the dielectric ALD products where they really need very tight temperature control.
Our thermal product actually engages with major customers and really kind of participates on this next node critical precursor development and module build.
That's a very good rundown of all the engagement. Yeah. I think there's something like CMP, maybe a little bit underappreciated, but it has been a very nice business, I think, in advanced packaging as well, including and probably can get more important in the future.
Yeah. Yeah.
Then let me ask you about laser. You made that UCT made that inroads into the EUV tools. And I think not starting from the first generation, but started from a little bit later generation of the EUV tools. That was a major penetration and probably contributed to some of your growth incrementally, especially for maybe 2024. That was probably the first year-ish of the ramp of that laser business. How's that business going so far? And what's your any view on the 2026 laser growth for UCT?
Yeah. I think that this is very good. Actually, that's really one of the areas we put our focus in because if you look at the leading-edge WFE SAM, laser becomes anywhere between, depending on the process flow, anywhere between 35%-45% of the WFE on the leading-edge fab. So therefore, increasing our share in laser is crucial for our growth. And so because our definition winning is our growth, the WFE market, as you know. So in the past few years, we really kind of enhanced the partnership with our laser customer. And we were able to participate in more modules from the initial Cymer engagement. So we actually are working on the new MPIs in their EUV roadmap and acquire additional modules within that scope. And we're looking for both organic and inorganic paths to further grow that segment.
Really, we see that we're definitely growing in terms of revenue in 2026 for our laser products. We also look forward to reaching a 10% revenue percentage in our laser products.
Okay. Yeah. 10%. That's an important milestone, I think, in terms of especially given that your other part of business is also growing.
Yeah. Exactly. Exactly. Therefore, I guarantee the revenue growth, but the share growth is a midterm goal.
Got it. Okay. So shifting gears from products to services, I think, let's say compare with your very direct peer, one unique aspect of UCT is you have a meaningful presence in service, higher margin as well compared to products. So can you tell us a little bit more about what your service business, what does it do, and what are some of the key drivers, especially in the context of 2026? Maybe WFE is growing. Industry utilization rate is hopefully rising across memory. And hopefully, at some point down the road, mature nodes to mainstream fab, second tier, third tier foundries, the utilization rate can grow a little bit. How much can you grow this business in this year? And what's the long-term objective in your mind about the service business? What kind of targets are you thinking?
It's a great question. I think that really, if you look at our service business, we mainly focus on the cleaning and the coating business that serve directly to the chip makers in their leading-edge fab, actually, mostly in the leading-edge fabs, and also, we actually also serve our WFE customers for the cleaning of their new parts, a new process kit in a new tool, so actually, in that sense, actually, our service business, it's kind of directly correlated with the WFE growth, but also directly correlated to the wafer starts at the customer wafer fab, so it's really a recurring business in terms of gross margin, and we want to grow faster than the rest of the business product portfolio.
And so with really kind of the 20-plus years of experience, we're really kind of leading on some of the critical cleaning process and the coating solutions that customers need more and more when they move into the leading edge. So we see there's definitely an upside potential when the customer really going to the next node, really looking for, if you ask a TSMC today, really the goal is zero defect. So that makes the cleaning business more and more important. I think that in terms of growth rate, we're looking at really a double-digit growth in 2026. And that's really directly related to this WFE increase, significant increase in 2026. The utilization, you mentioned the utilization rate increase of one of the major U.S. customers. And also, I think that at the late 2026, we see the ramp of the U.S. factories of the leading-edge customer.
We will definitely benefit from that as well.
Oh, so basically, companies like TSMC, maybe Samsung, have a little bit more ramp in the U.S. that actually will help.
It will help us as well, and on top of that, we're really expanding our product portfolio and product offerings so that we get more share on existing installed base.
Got it. Got it. So we often got asked about your competition because we have Ichor. I was with them here a few sessions back. Do you compete with them directly? Because people tend to compare you versus Ichor, but where do you overlap? Where do you not overlap?
Yeah. I think that if you look at our portfolio, we really kind of diversify our product in the last 10 years from the initial gas box business where we have the overlap with Ichor into a much broader product portfolio. We have service business. We have engineering products like thermal products, like the sub-fab systems, and also the Ham-Let, which is the welds and fittings for different applications. And also, we have the CM business. Even within the CM business, we have gas box. And also, we have major modules. So for example, we really kind of serve some of the EUV modules. That's really kind of we kind of diversify ourselves so we're not fully dependent on the gas box, up and downs, and intensify the competition. That's really the overlap we have with Ichor.
If you look, zoom in a little bit details into that space, we also have a very different approach of working versus competing with suppliers in the MFC space. So it's just a very different approach and very different product portfolios between us. So I wouldn't really kind of look too much into this.
So MFC, you said?
Mm-hmm.
The mass flow controller?
Mm-hmm.
Yeah. I think your competitors are really working on more of an in-house flow control kind of solution. Sounds like you're also working on something over there.
No. That's probably where the difference is. We see then we also look at vertical integration, but we really focus on the area that really we see that there's a need for a new player. So that's where we see the welds and fittings is the area we want to focus on. And that's where we bought Ham-Let a few years back. And it played pretty well. MFC is a little bit different space where you really have the OPLE that have 90% of the share. So how you compete with them and still rely on them when the big ramp like we're facing coming up. So we want to strategically position ourselves so that we really form strategic alliance with the major players. And, well, we differentiate ourselves through the other product offerings in the gas panel.
Got it. That's always the interesting part where there's a little bit difference in terms of the directions you want to take versus your peers. And definitely, we look forward to really see how this plays out. Maybe let me switch gear a little bit to China for a minute.
Sure.
The other part of the unique UCT business has been that you are a supplier into the Chinese semi-cap industry, at least two of them, one etch, one in deposition. A few quarters ago, that exposure was probably a downside contributor rather than an upside. I think that they were facing some technical challenges that have affected the ramp schedule. Has the situation been resolved? How do you think about your direct China business in 2026?
Yeah. This one, I don't want to give an oversimplified answer because we're dealing with a very complex situation here. So I think that if you look at on the big picture, China business to me actually have two folds. One is that we support our key customer like Lam Applied export the WFE to China. And we're proportionally be part of that. We always grow the business together with our customers at Lam Applied. And for domestic China OEMs, we have a long-term customer, as you said, two customers, one in etch, one in dep. And we have over 15 years of a partnership with those customers. We'll continue to support and grow.
At the same time, we'll carefully assess the compliance needed for both U.S. and Chinese government and Chinese and U.S. customers so that we position ourselves with the necessary capability to serve both sides of the customers.
Got it. Maybe let me double down on this. Do you expect that direct China business to grow this year?
Yes.
Or is it too early to call?
I think that the business itself as a percentage of a worldwide WFE will grow. That's really it's per the localization policy, per the actually end market need. So if you look at Applied and Lam, they all say China is going to be 30-plus% of WFE market. So this is the market that we definitely want to participate. But again, we want to carefully assess the compliance on both sides and capture the growth opportunities together with customer whenever we see the viability.
Got it. I think at the beginning, let me go back to the gross margin question. At the beginning, you mentioned about maybe three to five years getting to that $4 billion in revenue and 20% plus in gross margin, long-term target. Between 2020 and 2022, Ultra Clean gross margin, we're already in that 20% to 21% range. But it's just today, you were back at like in the high teens. So going forward, other than volume going back to the higher volume, anything else you may be doing already or plan to do will help you to get to that 20% gross margin a little bit faster? Can you kind of walk us through some of the things you've been working on?
Yeah. Definitely. Yeah. So I think that the UCT in 2021 and the UCT today are very, very different. I think that's really a surge of the actual capacity through overtimes to really capture the unexpected ramp at that time. So I remember the whole industry struggling with the ramp.
The shift.
Yeah. And so I'm sure that a lot of the CMs, including UCT, work overtime to get that actual capacity out of the factory, already overloaded factory. So that really created that margin surge as well. So you cannot really use that as normalized model. But I think the good news today is that UCT, because of that, we position ourselves into a future growth. So we actually, if you look at today's UCT, we can do anywhere between $2.5-$3 billion with our facility and equipment. We just need to add the labor when they see we got a clear signal of ramp from our customer, even if our today's run rate is $2 billion. So I think you will see definitely the margin improvement when we hit this $2.5-$3 billion range and see the margin expansion because of the scale and really matching our infrastructure.
And also, we have a further really expansion in six to nine months by facilitating our $4 billion infrastructure builds and really capture the further growth that really the industry is anticipating now. So I think that the gross margin expansion is going to be accelerated with this bigger ramp. And at the same time, as I said, we want to really intensify the technical content of our product portfolio, allbrow our engineering products and services so that that always kind of contributes to our margin profile. So we will accelerate the margin expansion so the higher percentage of the services and the engineering products.
Great. Maybe last question before we open up for Q&A. I want to ask you about inorganic growth. I think earlier, you actually talked a little bit about inorganic growth in some of the areas you just mentioned. But can you kind of walk us through what's the overall strategy for M&A and what you might have in store for the future?
Yeah. I think it's a very simple view on that. As I said, as a product guy coming from customer, I want to strategically invest in engineering product. So more getting the UCT product into our customer's roadmap, be co-innovator of the AI ecosystem. That's really the vision. And all the organic and all inorganic paths should fit into that vision and strategy. And we're going to, so what does it mean in terms of M&A? So really three areas. One is to really deepen the customer engagement and the technology partnership by really kind of acquiring the technology that's critical to customer's roadmap. So a simple example is really some of the critical process chamber content that really Lam and Applied rely on. So those areas I want to put the focus on. And also vertical integration.
But strategically position that vertical integration so we do not really step on our strategic suppliers or customers' toes, but still grow vertically to improve the gross margin. So that's really the product side of the focus on the M&A. The second side is really expand beyond the top two customers so that anything that really can help us to grow with the third, fourth, fifth critical customers, we're on it. And finally, it's really assess our own core competency and really in the mid- to long-term address one of the critical high-growth adjacent markets.
Fantastic.
Yeah.
I think we have a few more minutes for some Q&A. Please.
I think Ichor had some problems hiring and training employees recently. Is that industry-wide?
Allow me to repeat the question for the webcast.
Sure.
So, your direct peer has some hiring issue for some of the facilities based located inside the U.S. And do you see some similar issues as an industry-wide problem, or you don't see that?
Yes or no? I think that actually the challenge of talent in the U.S. for the semi industry is not secret. Not just Ichor, UCT, even our customers and our customer's customer facing the same challenges. So I think that's where the UCT I mentioned, what attracted me to UCT, one of the big reasons is our positive people-focused culture. So I think that reputation, UCT is known for really considering our employee as the important asset to us. So we really kind of care about the growth of our employees and the career development of our employees. That really kind of makes us attract talents, including myself. And also, I think that going forward, we also look at where is the hotspot of the semi talent hiring and try to avoid those hotspots, really grow our talent pool nationwide. And using the technology to enable them to work remotely.
And also really looking at some of the area really kind of some of the semi customer are divesting, like the recent acquisition we had is actually in Poland. So there's always a challenge, but I think the difference is how you address it. Yeah.
Any other questions? Yes, please.
Can you speak to the decision-making around moving from a $3 billion capacity to $4 billion? Would you have to reach that $3 billion to move to the $4 billion, or would you start investing ahead of that with your line of business?
Yeah. Good question. I think that, as I said, the brick and mortar capacity is already $4 billion, to say it that way. And really, the facilitation equipment today can handle up to $3 billion revenue. So to add those facility, clean room mainly, and also the equipment has a build cycle of six to nine months. So we need to have that signal reach us early enough in that time frame so that we can be ready for a $4 billion ramp. So it's all manageable.
Thank you.
Yeah.
All right. If nothing else, let's conclude this session. Thank you, James.
Thank you, Charles.
I appreciate your insights, and I hope everybody enjoyed the rest of the conference.