Good afternoon, ladies and gentlemen, and welcome to Ultra Clean Technology third quarter 2026 earnings call and webcast. At this time, all lines are in a 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 Tuesday, October 27, 2026. I would now like to turn the conference over to Rhonda Bennetto, Investor Relations. Please go ahead.
Thank you, operator. Good afternoon, everyone, and thank you for joining us. With me today are James Xiao, CEO, and Mike Keogh, CFO. James will start with some prepared remarks about the industry and highlight some of the opportunities ahead for UCT. Mike will follow with the financial review, and then we will 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 James.
James, please go ahead.
Thank you, Rhonda, and good afternoon, everyone. We appreciate you joining us for our third quarter 2026 earnings call. With me today is Mike Keogh, who came on board as UCT's Chief Financial Officer in August. This is Mike's first earnings call with us, and I will share a few more words about him shortly. This afternoon, I will briefly highlight our third quarter result, share our view of the industry, and update you on our UCT 3.0 strategy. Mike will then review our financials, and we will open the call for questions. I am very pleased to report that UCT delivered another strong quarter. Revenue from both product and service came in ahead of our expectations. Our bottom line also outperformed, reflecting our continued focus on improving profitability. These results highlight healthy demand across our end markets and solid execution by our team around the world.
This quarter also proved the effectiveness of our ramp readiness strategy. By planning capacity ahead of demand, we execute on the operational agility required to accommodate excessive orders and deliver them on time. AI demand continued to deliver strong investment across the semiconductor ecosystem, with the world's leading chip makers and equipment companies expanding capacity to support multi-year AI growth. As AI shifts from training to everyday use, it is creating demand across the entire chip stack. Leading-edge foundries are adding capacity on new nodes. Memory makers are adding clean room space and fab capacity for DRAM and next gen HBM. Advanced packaging is growing rapidly to fulfill HBM demand. These are the areas where UCT is the strongest, and as volume and complexity increase, our customers rely even more on our subsystems and engineering expertise.
Based on the visibility our customers are sharing with us, we now expect 2027 wafer fab equipment spending to be above $200 billion. That outlook is grounded in what we can see and measure. The signs that influence our decision-making are the length of our customers' forecast, the fab utilization, and the availability of critical components across the supply chain. Today, all three remain healthy for us. As our business continue to scale, we are prepared to anticipate and manage the supply chain excursions. Because we've had support by real-time visibility from our internal systems and from our customers, we can identify potential constraints early and address them quickly, so our customers' ramp continue uninterrupted. In a tight supply environment, that reliability is one of the most valuable performance we continue to deliver to our customer.
Through our UCT 3.0 strategy, we're using the upcycle not only to expand our capacity, but to strengthen our technical capabilities and accelerate our response time. Ramp readiness is driving disciplined growth. NPX is deepening our co-innovation partnership with our customers. Digital transformation is improving our operational efficiency and speed. Being ramp ready is fundamental to our customer first mindset. Ensuring we have the capacity and supply chain in place before our customer need them. The 26,000 sq ft of clean room space expansion was built out in Malaysia, came online earlier than anticipated, which help us to outperform this quarter. Over the next few quarters, we expect to double our weldment capacity in Cebu, Philippines, and to bring additional clean room capacity online in Singapore and the Czech Republic. We also expect to double our vertical integrated manufacturing capacity in Malaysia and Thailand next year.
This help address the critical component constraints that are limiting the industry today. By producing more of these components in-house, we gain greater control over our supply, improve on-time delivery to our customers, and position UCT to capture additional share during this ramp. Our NPX initiative continue to make solid progress within our growing Center of Excellence. Recently, we secured eight new program wins across etch, ALD, PVD, and lithography applications. Spanning gas delivery, thermal, and other critical subsystems. A similar number of programs are now moving through development and qualification across etch, deposition, lithography, and metrology. Co-innovating earlier with our customers strengthens our position to be qualified as the first supplier and to capture more high-value content per tool.
We expect these programs to gain momentum as our customers advance through their technology roadmap and node transitions in the coming years, and our product roadmap are fully aligned with our customers. Digital transformation is helping us scale more efficiently. Our initiatives are focused on the processes which we can make the most impact, starting with the quote-to-fulfill, the core of our value chain. We've also launched an integrated planning platform that links demand, supply, inventory, and the capacity in real time. In a tight supply environment, keeping materials moving smoothly between our customer, UCT, and our suppliers is critical. It is equally important that data move just as smoothly to enable the smooth material flow. This platform we launched automates that exchange, so when the customer demand changes, we can pass that signal quickly through our supply chain and respond with speed and agility.
We believe UCT has become a more strategically important partner to the world's leading equipment companies in manufacturing, in engineering, and in service. Our objective is unchanged, to move fast, stay agile, and deliver what matters most to our customers. Continuing to execute on those principles will create sustainable long-term value for our shareholders. Before I hand the call over, I'd like to formally welcome Mike to UCT. He has already made significant impact working very closely with our leadership teams on operating discipline, footprint optimization, capacity planning, and our digital transformation initiative. We're very glad to have him on the team. Mike, now over to you for the financial review.
Thank you, James, and good afternoon, everyone. I'm pleased to join you for my first earnings call as UCT's Chief Financial Officer. I joined UCT because I see compelling growth opportunity as the semiconductor industry enters what we believe are the early stages of a multi-year growth cycle. This is an exciting inflection point for our industry and UCT's deep technical capabilities and long-standing customer relationships position us well to support the demands we're seeing today and the opportunities ahead. My priorities will center on strengthening execution and disciplined capital allocation. That includes driving cash conversion and building the financial processes and capabilities to support UCT as we scale. With that, let me turn to our quarterly financial results. In my prepared remarks, I will be referring to non-GAAP numbers only.
As James mentioned, the third quarter marked another period of strong performance for UCT, with top and bottom line results above the high end of our guidance. Revenue was $759 million, a record quarter, up 17.7% sequentially and 48.8% year-over-year. Gross margin was 17.3%, up 60 basis points from last quarter, and operating margin was 9.0%, up from 7.0% in Q2. EPS was $1.15, up $0.45 over the prior quarter. Semiconductor products represented 86% of total revenue, including 52% from foundry and logic, and 34% from memory. Services represented 10% of revenue, while non-semiconductor markets accounted for the remaining 4%. Our two largest customers contributed 61% of total revenue. Products revenue was $681.9 million, up 19.1% sequentially.
The increase in sales was driven primarily by strength in etch and deposition, supporting gate-all-around, and high-bandwidth memory, which positions us well for the current wave of node transitions as the industry ramps. Services revenue was $77.1 million, up 6.7% sequentially on strength across both our OEM and fab customers. Services revenue growth traditionally lags products as increases are tied to wafer starts. We expect services revenue to increase incrementally over time as the new U.S. fabs come online and ramp, with a larger contribution as wafer starts increase throughout 2027 and 2028. Our revenue follows the same underlying demand as our largest customers, but not always quarter to quarter. Timing differences can be caused by product mix, where our content is integrated, shipping flows, revenue recognition, and fiscal calendars.
Historically, averaged as a group, we track in line with our customers and expect to perform in line with WFE growth. Total gross margin was 17.3%. Products gross margin was 15.9%, up from 15.1% in Q2, and services margin was 30.1%, up from 28.9% in the prior quarter. The improvements were driven by increased volumes and stronger contributions this quarter from our higher-margin product lines. Margins can vary quarter to quarter with fluctuations in volume, mix, region, materials, and freight. We continue to see a path to our target of 20% gross margin at $4 billion of revenue, driven by higher volume utilization, a growing mix of higher value engineered products, increased vertical integration, and more production in lower cost regions. These gains will build steadily rather than in large steps, and capacity expansions may be a temporary headwind as each phase comes online.
Operating expense was $62.9 million, or 8.3% of revenue, compared to $62.9 million, or 9.7% of revenue in Q2. Total operating margin was 9.0%, up 200 basis points over Q2. By segment, products improved to 8.5% from 6.5%, and services increased to 13.6% from 11.2% in the prior quarter. Our tax rate was 20.0%, and EPS was $1.15 on 46.2 million diluted shares. Operating cash flow was - $42.3 million, reflecting demand acceleration and the working capital required to ensure timely delivery to our customers. Inventory was $723.3 million, up $93.4 million from prior quarter. During this upcycle, we have been building inventory, including pre-ordering critical components and maintaining elevated levels of safety stock to help mitigate potential supply chain disruptions and continue to meet or exceed customer delivery expectations.
Through our ATM equity program, we sold 432,000 shares in Q3 at an average price of $80.13, which resulted in approximately $34 million in net proceeds. In the first week of the fourth quarter, we sold an additional 2.2 million shares under the program at an average price of $78.45, and received another $169.1 million in net cash proceeds. We used a portion of these proceeds to pay off the outstanding balance on our revolving credit facility. Currently, we have $193 million remaining of the $400 million ATM program. We ended the quarter with $270.9 million in cash, compared with $255.9 million last quarter. Now let me turn to capacity, because this is a very important driver of our growth plan. I'll cover where we are today, what comes next, and how we manage the risk.
During the quarter, we accelerated capacity expansion and now expect to be at approximately $4 billion of capacity in Q1, and see a path to additional capacity and increased utilization through further optimization of our current footprint through 2027. In addition, we continue to have about 15%-20% burst capacity to bridge us to our next phase of expansion. Growing to $5+ billion will require additional capacity beyond our current footprint. We anticipate investing roughly $80 million-$100 million incrementally through 2027 and 2028 to support this expansion. We are in conversations with our customers to help identify strategic locations that align with their long-term roadmaps. Taken together, our current footprint supports the next phase of growth, and we will add capacity for $5 billion and beyond in phases, pacing our investment to customer demand. Now to our outlook.
For the fourth quarter, we expect revenue of $800 million-$860 million, up 9.4% sequentially at the midpoint, and expect EPS of $1.11-$1.35 on approximately 48.9 million diluted shares. In summary, we delivered excellent results on solid execution. We have the capacity in place for our next phase of growth, and we will continue to execute on our UCT 3.0 strategy with the agility and discipline this cycle demands. With that, operator, please open the call for questions.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. To ask a question, you may press star followed by the number one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star followed by the number two. Your first question comes from the line of Timothy Arcuri with UBS. Please go ahead.
Thanks a lot. James, you are expanding a lot, obviously to support this ramp. You are also investing lots of money. Mike, you talked about investing another $80 million-$100 million. I am sure your customers will help you with that. What sort of assurances, this is a lot of money that you are investing, how do you think that on the other side of this, is there some way that you can be part of their preferred program, that you ensure that you will gain share through this? Is there something that you are getting in exchange for investing all this money? Obviously, you want to help them, but is there some other thing you can do to make you even stickier with them and cause you to gain some share? Thanks.
Thank you. Great question, Tim. As you see, the whole industry is really looking for a long-term agreement, starting from our customer's customer. Our customer also looked at the supply chain resilience they mentioned in our earnings call. With that, we actually have very open and constructive discussion with our key customers. We really try to engage with them early on so that the future forecasts are shared and the future demands are really openly discussed, and that the future capacity we are going to add are going to be fully utilized by our key customers.
Yeah, I guess just on that point, James. Mike, it sounds like you are expanding to more than $5 billion worth of capacity. That translates to like $330 billion in WFE. That is much higher than what people think 2028 is going to be. Obviously, you must be getting signals from your customers to go out and spend this money, otherwise you would not be doing that. Is that an unreasonable sort of estimation of where WFE is going? It sounds like that capacity is going to be in place to support 2028. Is that right? Thanks.
Just a small correction, Tim. If you do really proportional ratio our revenue to the WFE, our $5 billion run rate is approximately to a $250 billion WFE. That is well in line with even your own forecast, right? Most of the analysts, I do not think any of the customers gave a clear WFE number beyond 2027. As you can see, most of the analysts gave a $250 billion WFE in 2028, and we do not see a reason not to agree with that.
Okay. All right. Thank you.
Thank you.
Your next question comes from the line of Charles Shi with Needham. Please go ahead.
Hey. Thanks for taking my question. Hey, James. Hey, Mike. Maybe the first question about the supply chain excursion. We have heard your largest customer a week ago talk about the supply constraints holding them back a little bit. That did come across as a surprise, at least to me. I would have think supply chain excursion, like you said, it will happen, but maybe not to the degree this early. But where exactly you see are the potential supply chain excursions right now? Specifically, there have been good amount of chatters about mass flow controller, MFC shortage, and how are you navigating through that? Just from your numbers, your reported numbers this quarter and your guidance for next quarter, clearly, you do not look like the one holding your customers back, but want to get your thoughts. Thank you.
Thank you. I think that this was broadly discussed in our industry at this moment. As I mentioned, Charles, before, when you see the industry grow at more than 10% quarter-to-quarter growth rate, the supply chain will continue to face increasing pressure. So excursion will happen. It did happen. I think that as Mike mentioned, we actually proactively position ourselves by always having excessive capacity one to two quarters ahead of the demand forecast we see. We also build safety stock to really address the supply chain excursions. So that operation agility and supply chain resilience help us to manage this excursion better. One thing I can tell you is that we do not miss a single module of subsystems that are needed for our customers' quarter.
And we also really exceed our forecast by really handling the drop-in demand that customers pushed to us during the last two quarters. That should tell how well we managed this supply chain excursion, and we will continue to do so.
Thanks. Maybe a follow-up that actually still goes back to the MFC shortage. James, any thoughts based on your discussion with the MFC suppliers? Well, given that you actually don't have an MFC business, so I imagine that the conversation dialogue with the suppliers may be more candid. What's the latest? What you hear from them when they think the supply can be more in balance, more matching demand, when the supply can catch on to the very rapidly growing demand for MFC. Thank you.
Yeah, I think that the MFC constraints may continue for a quarter or two, but we definitely see that, at the end of the day, the industry will address that challenge collectively. Closely communication with our customers and also with our suppliers will help us to smoothen that challenge. Really, the collaboration and the partnership matter the most at this moment.
Thanks.
All right, thank you. Your next question comes from the line of Krish Sankar with TD Cowen. Please go ahead.
Hi, this is Robert Mertens on the line on behalf of Krish. Congratulations on the strong quarter and guide. My first question, you sort of have addressed just on the component shortage side, but maybe going along with that, if you could just expand a bit on what areas you're co-innovating with customers, where you think the customized approach adds the most value. How do you weigh those opportunities against expanding your manufacturing capacity and flexibility, being able to actually ship what the customers want in addition to making sure that you have a long runway with the product roadmap?
Great question. I think that we'll definitely do both. So immediate need to really demonstrate our long-term partnership with our customers, really fulfill their ramp requests by really fast fulfill the demand that really increase quarter by quarter right now, and we're doing well on that. In term of the NPI engagement with our customers, we did launch the Center of Excellence, NPI in Hillsboro, leveraging our acquired company called HIS. The engineering capability and the prototype manufacturing capability there gave us a very flexible capability to co-work with customer on their new product development. By utilizing that, as I mentioned in the announcement, we were able to successfully engage on eight NPI programs with customer spread over different product lines at the customer site. What it does is really fully aligned with customers' future product roadmap.
We'll see those products most likely get prototyped on the next node NPI the customer is going to commercialize in the next two to three years. We'll have a meaningful margin expansion and share gain when we have that into the high-volume production mode. At the same time, I think we also continue to engage with customer, getting into their design phase. So changing our integration mode from build-to-print to build-to-spec. That will further improve our stickiness and technology collaboration with our customers and improve our share and margin.
Great. Thank you. That's very helpful.
All right. Thank you. Your next question
Thank you.
comes from the line of Edward Yang with Oppenheimer. Please go ahead.
Hi, James, Mike. Thanks for the time. My question's also on supply chain, and congrats on your execution there. Understanding that UCT is delivering on time, could delays in other suppliers' components prevent customers from completing systems? Would that ultimately affect you? Just want to better understand that.
Yeah. Thanks for the question. Is your question related to our suppliers and whether they're going any subsystems that may impact our ability to ship?
No, I'm saying if there are competitors or others in the ecosystem that might have these excursions, even if you're executing, when they're going into the end system, with the excursions elsewhere, could that affect UCT?
Yeah. Right now we're not seeing that. As James mentioned earlier, we were not gated by anything last quarter. We didn't miss a shipment. There continues to be a lot of pressure in the supply chain, and we do have to look out for that, and we've been thoughtful about where that may come from. As we're seeing increasing revenue, we have been buying ahead and ensure that we have our strategic supply met. I think we have to continue to stay diligent for it. When we've looked at our Q4, we've taken some of that into account, where we think that risk may come from. But right now, I still feel like we're pretty well-positioned for that, and that's not going to play into our ability to ship.
Okay. My follow-up question's on your large [inaudible] recently announcing an expansion into optical inspection. Are you seeing any opportunities opening up for new subsystem or engineering opportunities for UCT? Are you engaged in supporting any of these new platforms?
Ed, as you know that we actually have all the major WFE customers as our existing customers. We are familiar with the optical inspection systems and also the lithography systems. If you break down into the subsystem level, there are a lot of similarities. Therefore, yes, we will have new opportunity as we customer for that optical inspection and the challenge.
All right. Thank you very much.
Thanks, Ed.
Your next question comes from the line of Christian Schwab with Craig-Hallum. Please go ahead.
Hey, guys. This is Ben Taxdahl for Christian. A lot of my questions have been answered, but I got one left for you. This call, very positive commentary. Last call, this call almost maybe even seems more positive compared to last call. I guess, are you guys thinking about it like that as well in the environment going forward? Tying to that, specifically, what has the conversations been like with customers over this last quarter and how have they evolved and has it been extended out? It seems like you have some capacity pull forward and such, so can you just articulate that a bit?
Yeah, I think that the sentiment does not change that much. I think it is just that we execute pretty well. Maybe that make a little bit different, right, in term of the results and how it looks. On the customer side, I think that you hear them saying that it is 2027 is solid, above $200 billion. That is really more confirmed compared to a wider range a quarter ago. I think 2027 is more solid. Probably one thing we can say now. The second thing is that we start to hear from, you can also hear from their earnings call that 2028 is more or less booked as well. So, you see different numbers, but what I see is really what the analyst community are spelling out, the $250 billion WFE involved. I do not hear any of the customer gave that number yet.
So yeah, you are not hearing customers, but 2028 is coming to life a little bit more. All right. That is all I got.
Also, I think that you also hear the news that there is a new factory announcement, like TSMC's Dallas fab and the Terafab. It is become more concrete.
All right. I appreciate it. Thank you.
Thank you.
Thank you. I am showing no further questions at this time. I would like to hand it back to James Xiao for closing remarks.
Well, that concludes our Q3 2026 earnings call. Thank you all for joining us, and I will see you all in the next quarter.
Thank you, presenters, and ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.