Key Points

• Revenue reached $518.8 million, topping expectations by $17.97 million and matching analyst EPS estimates.

• Non-GAAP gross and operating margins declined year over year in Q2 FY2025.

• A $151.1 million goodwill impairment led to a significant GAAP net loss in Q2 FY2025.

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Ultra Clean (NASDAQ:UCTT), a supplier of engineering and manufacturing solutions for the semiconductor industry, released its second quarter 2025 earnings on July 28, 2025. The company’s GAAP revenue surpassed analyst expectations in Q2 FY2025, coming in at $518.8 million (GAAP) versus the $500.8 million estimate, while non-GAAP earnings per share (EPS) landed squarely in line with forecasts at $0.27. The overall quarter was marked by weak profitability, as the company recorded a large non-cash goodwill impairment that swung its GAAP net results deeply negative. Despite matching non-GAAP EPS expectations and slightly beating GAAP revenue forecasts, the results reflected ongoing challenges in demand and operational efficiency.

Source: Analyst estimates provided by FactSet. Management expectations based on management's guidance, as provided in Q1 2025 earnings report.

Business Overview and Strategic Focus

Ultra Clean is a manufacturing and engineering partner for original equipment manufacturers (OEMs) in the semiconductor industry. The company is best known for building and servicing essential components and sub-systems used in semiconductor manufacturing, providing both products and services to many of the industry's biggest names.

The company’s main focuses currently include managing its customer concentration, deepening its strategic position in the semiconductor supply chain, and maintaining flexibility by operating manufacturing and service sites in multiple regions worldwide. Ultra Clean also continues to invest in innovation and technology development, aiming to stay aligned with evolving customer requirements while pursuing cost efficiency through vertical integration and strategic acquisitions. Key success factors for the company include maintaining strong relationships with several major customers, executing on supply chain localization initiatives, and controlling costs as the demand environment fluctuates.

Quarter Review: Revenue, Margins, and One-Time Items

During the quarter, Ultra Clean generated GAAP revenue of $518.8 million, nearly flat sequentially. Products, which include gas and liquid delivery subsystems essential for semiconductor manufacturing, contributed $454.9 million (GAAP), while the services business, focused on specialized cleaning and analytics for chipmaking tools, brought in $63.9 million (GAAP). Services revenue (GAAP) showed a modest sequential uptick but was also largely unchanged year over year.

Non-GAAP gross margin fell to 16.3%. The products segment recorded a gross margin of 14.4% (non-GAAP), while the services segment’s gross margin was 29.9% (non-GAAP), underscoring the higher-value nature of cleaning and analytics compared to core product manufacturing. The operating margin on a non-GAAP basis dropped to 5.5%.

The quarter was heavily affected by a $151.1 million goodwill impairment (GAAP), a non-cash charge (GAAP) reflecting a downward revision in the anticipated future value of prior acquisitions. This pushed the company’s GAAP operating margin to negative 27.3%, leading to a GAAP net loss of $162.0 million, or $3.58 per share. Without adjusting for this impairment, the company’s bottom line (GAAP net loss) would have shown much smaller losses.

Segment performance showed little change in either direction. While gross margins in the segment slipped, services provided stability, aided in part by expanded engineering support in areas such as lithography and sub-fab systems. Overall, the lack of revenue growth alongside shrinking margins highlighted the ongoing challenges the company faces in lifting its earnings profile absent a broader recovery in industry demand.

Balance sheet management was a priority. Cash and cash equivalents (GAAP) increased to $327.4 million, and spent $7.8 million on research and development (R&D) (GAAP), but did not announce any major new capital initiatives.

Key Business Drivers and Ongoing Risks

Ultra Clean’s most notable business risk, customer concentration, continues to loom large. No segment revenue was broken out by customer this quarter, but prior disclosures show that two customers, Applied Materials (NASDAQ:AMAT) and Lam Research (NASDAQ:LRCX), historically contribute more than half of total sales. Revenue with its largest customer was described as flat quarter-on-quarter, with its second largest customer’s revenue was slightly down. The company remains focused on solidifying these relationships while seeking incremental diversification where possible. Customer concentration risk means that any slowdown, loss, or renegotiation with a key account can have an outsize impact on the company’s results.

Strategic initiatives to localize supply chains and adapt to changing global trade policies continued this quarter. Ultra Clean’s multi-region manufacturing approach remains a hedge against policy shifts and tariffs, though no new factories or major reductions in footprint were announced this quarter.

On the technology front, the company increased its R&D spend to $7.8 million (GAAP). Investment continues in new products for critical subsystems and cleaning technologies. The company emphasized ongoing engineering collaborations, notably in lithography portfolio expansion and services aimed at supporting advanced chipmaking, but did not attribute revenue growth to these activities so far.

Cost-cutting and efficiency improvements remain a high priority, with actions under way to realign operating expenses with current demand levels. Headcount reductions, ongoing review of manufacturing footprint, and broader expense discipline were reiterated. The benefit of these steps is expected to be realized later in the year rather than providing an immediate improvement to margins or profits in the quarter. UCTT does not currently pay a dividend.

Outlook and What to Watch

Looking ahead, management guided to revenue in the range of $480 million to $530 million for Q3 2025 and a non-GAAP EPS between $0.14 and $0.34 per share. The midpoint of this outlook suggests continued revenue stagnation with profitability under pressure. The company expects to start seeing the benefits of its cost reduction program later in the year, but did not project a near-term uptick in demand or clear margin recovery.

Management commentary remained cautious, noting that the industry remains “highly dynamic.” The ongoing dependence on a handful of major customers, sector-wide slowdowns in semiconductor capital spending, and policy-related uncertainties such as tariffs all continue to shape the landscape. Should the broader semiconductor sector rebound, management believes Ultra Clean is positioned to capture renewed growth, but for now, underlying trends remain steady and unremarkable.

Revenue and net income presented using U.S. generally accepted accounting principles (GAAP) unless otherwise noted.

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JesterAI is a Foolish AI, based on a variety of Large Language Models (LLMs) and proprietary Motley Fool systems. All articles published by JesterAI are reviewed by our editorial team, and The Motley Fool takes ultimate responsibility for the content of this article. JesterAI cannot own stocks and so it has no positions in any stocks mentioned. The Motley Fool has positions in and recommends Applied Materials and Lam Research. The Motley Fool has a disclosure policy.

Artificial intelligence (AI) is set to play a key role in driving global economic growth in the long run. The evolving technology is expected to boost productivity, create new revenue streams, and facilitate innovation.

Market research firm IDC, for instance, forecasts that in 2030, each dollar spent on AI-related services will generate $4.60 in value. And a report from the United Nations Trade and Development office suggests that the AI market could surge in value by 25x over the next decade, generating a whopping $4.8 trillion in revenue in 2033.

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With that in mind, it won't be surprising to see organizations and governments investing far more money in AI-focused hardware and software to become more productive and efficient. That's why investors would do well to take a closer look at a couple of names that are playing central roles in the proliferation of AI.

Image Source: Getty Images

1. Broadcom

Broadcom (NASDAQ: AVGO) makes specialized application-specific integrated circuits (ASICs) and networking chips used in data centers, and demand for its processors has taken off thanks to the proliferation of AI systems. Several cloud computing giants have been deploying Broadcom's custom AI processors to lower the costs of AI training and inference, and to reduce their reliance on expensive graphics processing units (GPUs) from Nvidia.

ASICs are custom AI processors built to perform specific tasks, allowing them to deliver more computing power with lower energy consumption when compared to general-purpose GPUs. The advantages of custom AI processors make them ideal for large-scale deployment in data centers and are precisely the reason why Broadcom's AI business is taking off.

Currently, three hyperscale cloud customers use Broadcom's custom accelerators in large AI data centers to develop next-generation models. The chipmaker is deeply engaged with these customers to develop even more advanced custom processors and networking chips to support their product roadmaps for the next three years.

In Broadcom's view, these three hyperscalers alone should create a serviceable addressable market (SAM) worth $60 billion to $90 billion for it by fiscal 2027. The company's AI revenue jumped by 77% year over year in the first quarter of its fiscal 2025 to $4.1 billion, so it is currently clocking a more than $16 billion annual run rate.

Broadcom, therefore, has terrific room for growth in the custom AI chip market over the next three years. But it's also worth noting that the company is engaged with another four hyperscalers that are looking to build and deploy custom AI accelerators. Broadcom is in the final stages of chip development for two of those customers, while the other two recently selected the chipmaker to build their own custom chips.

So, Broadcom's addressable opportunity in custom AI chips could be much larger in the long run than what the company recently projected. As a result, it could end up delivering much stronger revenue growth over the next three fiscal years than what analysts currently expect.

Data by YCharts.

The semiconductor giant could easily exceed that $82 billion revenue forecast in three years, once it is producing custom AI chips in large volumes for all seven of its customers. This probably explains why the company trades at an attractive price/earnings-to-growth ratio (PEG ratio) of 0.64 based on its projected earnings growth for the next five years, according to Yahoo! Finance.

The PEG ratio is a forward-looking valuation metric that takes into account a company's expected earnings growth; a positive reading of less than 1 is generally viewed as an indication that a stock is undervalued. Broadcom's PEG ratio is well below that mark. As such, investors should consider buying this AI stock right away, before it flies higher following the 26% gain it clocked over the past month.

2. Lam Research

Lam Research (NASDAQ: LRCX) manufactures semiconductor manufacturing equipment -- machines used by foundries and chipmakers to make chips for everything from smartphones to cars to computers to data centers. And the market it operates in is on track to expand nicely due to the growing demand for AI chips.

According to one estimate, global spending on semiconductor equipment could jump to $121 billion in 2025 and to $139 billion in 2026. Those estimates point toward a nice improvement from last year, when spending stood at $113 billion. However, don't be surprised if semiconductor equipment spending increases at an even faster pace based on recent updates from key chip companies involved in the manufacturing of AI equipment.

Foundry giant Taiwan Semiconductor Manufacturing, popularly known as TSMC, plans to have eight new chip fabrication plants under construction this year, as well as one advanced chip packaging facility. Memory specialist Micron Technology, meanwhile, expects to lay out $50 billion in capital expenses in the U.S. through 2030. As such, it is not surprising that Lam Research saw an impressive acceleration in its revenue and earnings growth.

In its current fiscal year, analysts expect its sales to increase by 22% to $18.2 billion and its earnings to increase by 32%. What's more, management is confident that it will achieve revenue in the $25 billion to $28 billion range by 2028, indicating that its top line could jump by around 50% over the next three fiscal years.

Assuming Lam hits the midpoint of its 2028 forecast range and that the stock maintains its current price-to-sales ratio of 6.4 at that time, its market cap would increase to around $170 billion. That would amount to a jump of around 65% in the space of three years. However, Lam today trades at a cheaper price-to-sales ratio than the U.S. technology sector's average of 7.4. So it won't be surprising to see this semiconductor stock delivering even stronger gains than that, as the market could put a higher valuation on it in light of its robust growth.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lam Research, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.