ACM Research, Inc. (ACMR) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. Thank you for standing by, and welcome to ACM Research Third Quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, we are recording today's call. If you have any objections, you may disconnect at this time. Now I'll turn the call over to Mr. Gary Dvorchak, Managing Director of The Blueshirt Group. Mr. Dvorchak, please go ahead.

Thank you, Amber. Good day, everyone. Thank you for joining us on today's call to discuss third quarter 2020 results. We released results after the U.S. market closed yesterday. The release is available on our website as well as from Newswire services. There's also a supplemental slide deck posted to the investor portion of our website that we will reference during our prepared remarks. On the call with me today are our CEO, Dr. David Wang; our CFO, Mark McKechnie; and Lisa Feng, the CFO of our operating subsidiary, ACM Shanghai. Before we continue, please turn to Slide 2. Let me remind you that remarks made during this call may include predictions, estimates and other information that might be considered forward-looking. These forward-looking statements represent ACM's current judgment for the future. However, they are subject to risks and uncertainties that could cause actual results to differ materially. Those risks are described under risk factors and elsewhere in ACM's filings with the Securities and Exchange Commission. Please do not place undue reliance on these forward-looking statements, which reflect ACM's opinions only as of the date of this call. ACM is not obliged to update you on any revisions to these forward-looking statements. Certain of the financial results that we provide on this call will be on a non-GAAP basis, which excludes stock-based compensation, a loss relating to a change in fair value of the financial liability and an unrealized gain in trading securities. For our GAAP results and reconciliations between GAAP and non-GAAP amounts, you should refer to our earnings release, which is posted on the IR section of our website. With that, let me now turn the call over to David Wang, who will begin with Slide 3. David?

Thank you, Gary, and welcome, everyone, to today's call. Our third quarter results represent another productive quarter with strong financial results, a new product launching and greater progress on our strategic initiatives. Revenue grew to $47.7 million, up 43%. Shipments were $59 million, up 37%. Both revenue and shipments were at record levels. We delivered greater balance of growth and profitability with 43% gross margin and 22% operating margin. We are committed to delivering profitable growth as we continue to invest in R&D for new products and global sales and marketing. We ended the quarter with $92 million of cash. We also had a $24 million of PE security on our balance sheet from our investment in SMIC STAR Market IPO. I will now discuss recent operational highlights. Please turn to Slide 3. Our momentum continued in the third quarter. We had a strong shipment of new products to both our existing customer and a newer customer. We delivered another Tahoe tool for revenue to our leader foundry customer, making our third Tahoe in production environment. We continue to see strong interest from current and prospective new customers. Tahoe delivered unique combinations of strong cleaning performance, while using 80% less sulfuric acids. We delivered 2 ECP ap tools for repeat shipment to a leading packaging customer. Our Ultra ECP ap is a back-end tool that provides better 3D performance by putting a more meaningful metal layer in the notch area. We also delivered first tool of the newer member of ECP family, the ECP 3D, to a VD foundry customer in China. The Ultra ECP 3D is a front-end tool that offers enhanced gap filling for high aspect ratio TSV layer. This is a critical technology for high-density stacking of 3D chips, as our customers moving to more advanced production nodes. In September, we delivered second-generation TEBO tool to a existing lead customer. We had a significant technology upgrade, including a process that delivered the higher particle removal efficiency, PRE, with a wider damage-free target window. We expect that this will help accelerate the adoption of TEBO. This is the first tool, and we repeat -- we expect revenue recognition upon qualification and acceptance. Also last week, we announced an important milestone for TEBO. The United States Patent & Trademark Office approved a fundamental TEBO patent. This strengthens our leadership position in advanced damage-free megasonic cleaning technology for sophisticated 3D semiconductor device structures with patent protection for near 2 decades. Our third quarter shipments, including multiple semi-critical first tool for newest customer, a leading China-based analog and a power IC manufacturer. The first tool include scrubber, semi-wafer backside cleaning tool, auto wet bench and also SAPS-II cleaning tool. We expect acceptance and revenue to be likely 2021 event. Look at this achievement, I'm proud of our engineering teams. Over the past several years, the team has added many new and innovative platform to expanding our product offering beyond our flagship cleaning tool to ECP training tool, SFP packaging tool and vertical furnaces. Now turning to Slide 4. For those who are new to ACM, I will review our product portfolio and the market opportunity. We estimate our current product portfolio addresses $5 billion of total market opportunities. This spans DRAM, 3D NAND, foundry, power and analog application devices. Our core market as for cleaning tools, starting with our flagship single-wafer cleaning products, SAPS, TEBO and Tahoe, and our 3 semi-critical cleaning products. We estimate these tools address about 80% of $3 billion wafer cleaning market for $2.4 billion market served by ACM cleaning product. Our newer product at another $2.6 billion, including $1.6 billion from the vertical furnace and $5 billion each from ECP and stress-free polishing products. We are focused on gaining market share by expanding our product lines and winning new customers. Our road map for expansion expands many years into the future. We have a unwavering commitment to expand our market opportunity with new products. Please turn to Slide 5 for a discussion of our customer base. We have 5 major front-end customers across in DRAM, foundry and 3D NAND. We have several back-end wafer packaging and assembly customers. And our newest customer manufacture power and analog device. We believe these customers alone represent a significant opportunity for ACM. Many of them are still in early and middle stage of multiyear capacity expansions and are only buying a fraction of our full product portfolio. Naturally, we expect to continue to add new customer as we believe every major semiconductor manufacturers can benefit from our technology. As we discussed on previous calls, we are actively engaged with a number of potential first tier new customers in North America and Taiwan. Please turn to Slide 6. We are actively adding production capacity and development capacity to support our near-term and long-term growth plans. Our original facility in Shanghai remains. Headquarters is in Shanghai. It's including our R&D, SG&A and prototyping and production of newer products. We began production at our second factory in September of 2018 and opened the second floor for the production in the third quarter of this year. This increased capacity at our second factory from 250 million to more than 350 million. Our long-term solution is Lingang facility, which will become our R&D center, providing employee housing and will have the floor space to increase our production capacity by fivefold. We broke ground on the Lingang facility in July of this year and plan to begin production by middle of 2022. Before I discuss our 2020 outlook, I would like to discuss 2 important items. First, I will address the short seller report that was published in early October. We stand by comments made in our October 8 responsible press release, and we fully refuse the allegations made in the report. Over the past few weeks, ACM Shanghai's China IPO team, which includes [ iPhones ], IPOs, investor bankers; BDO, our auditors 'and CWM, ACM Shanghai's China legal team, have performed a detailed review of all the allegations. Most of the items were easy to refuse as the 43 page report from the short seller included mainly new statements of facts, contradictory opinions and a general list on the spending of our industry. For other items, the team performed confirmatory, lag work, including interviews with customers, suppliers and management and documentary review. The team has delivered a comprehensive report of their finding to the Shanghai Stock Exchange Commission. This report fully refuted all of the allegations on a point-by-point basis. At this point, we have not yet decided if we will release report, but we are happy to take any questions on after the call. Second, the update on ACM Shanghai STAR Market IPO is later May 2020. We submitted IPO applications to Shanghai Stock Exchange Commission. After too long of the question and answer, later in September, the STAR Market Listing Committee approved applications. At this point, the listing is subject to submission of formal registration and to review and approval by the China Securities Regulatory Commission. With a timely registration, we expect to launch the process later this month and product IPO by year-end. Before I turn the call over to Mark, I would like to discuss our 2020 outlook. We now turn to Slide 7. Looking forward, we are excited by our business opportunities. We remain optimistic about the remainder of 2020 and our growth prospects for 2021 and beyond. Accordingly, we have updated our full year 2020 outlook as follows. We have reached low end of our range. We now expect revenue to be between $145 million and $155 million compared to the prior range of $140 million to $155 million. The reverse revenue range represents 39.5% NA growth at the middle point. The implied revenue at the middle point for the fourth quarter represents 58% year-on-year growth. Our outlook for the remainder of 2020 is based on several key assumptions. First, COVID-19 situation remains stable in China and working on a global basis in the coming months. Second, Chinese semiconductor industry fab investment continues. Third, the revenue range assumes good growth from NAND and foundry large customers and muted DRAM recovery. Our outlook, also assuming limited contribution in Q4 from SMIC. Our results and outlook demonstrated successful execution of our strategy. Our strong growth is providing opportunity to our tax rate, our R&D spending in new products and deliver the profitability that our investors expect. We are building a global sales and marketing resources to penetrate their new customers in new regions. And we are scaling production capacity to support our long-term growth plan as we continue on our mission to become a major equipment supplier to the global semiconductor industry. To conclude, I would like to thank our employees for their hard work and dedication. I also want to thank our customers, partners and shareholders for their continued support and confidence in ACM Research. I will now turn the call over to Mark to discuss the financial results in more detail.

Thank you, David, and good day, everyone. We had strong financial results in the third quarter. Unless I note otherwise, I will refer to non-GAAP financial measures, which excludes stock-based compensation, change in fair value of financial liability and unrealized gain in trading securities. A reconciliation of these non-GAAP measures to comparable GAAP measures is included in our earnings release. Turning to Slide 8. For the third quarter, revenue was $47.7 million, up 42.6%. Growth was driven by solid demand for our front-end equipment and back-end tools. We had a strong contribution of revenue from 3 of our major front-end customers and also 1 of our back-end customers. Total shipments were $59 million versus $43 million in the year ago quarter and $45 million last quarter. As David noted, this marked another record level of quarterly shipments, an important demonstration of scale to the industry. Total shipments include deliveries for which revenue was recognized in the quarter as well as deliveries of systems awaiting customer acceptance for potential revenue in future quarters. Gross margin was 42.8% versus 49.1%. Gross margin was within our long-term target of 40% to 45%. Gross margin varies on a quarterly basis due to a variety of factors such as sales volume and product mix. Operating expenses were $10.1 million, up 29%. The year-on-year increase was driven by higher R&D on new products, higher G&A expenses related to the STAR Market IPO. Operating income was $10.3 million, up 19.8%. Operating margin was 21.6% versus 25.7%. Now some detail below the operating line. Non-GAAP results exclude stock-based compensation and 2 additional items. The first change in fair value of financial liability is a nonoperating noncash book loss of $6.5 million. As described in last quarter's call and in our 10-Q filings, the liability was related to private equity investments in ACM prior to the 2017 IPO. The PE investment was restructured through a number of agreements to comply with the STAR Market IPO. The liability was terminated on July 28 with the issuance of an equity warrant, after which it became a balance sheet item, will no longer impact our impact -- our income statement in Q4 and beyond. Second is the unrealized gain on trading securities of $9 million from our SMIC investment. The investment was mark-to-market at quarter end, and the gain reflects the increase in value from the original IPO price. We will exclude this item from the non-GAAP results until the gain is realized when or if we sell the shares. Net interest expense was approximately $0.1 million, unchanged from last year. Other expense was $1.8 million versus other income of $1.8 million. This is a significant year-on-year swing of $3.6 million that impacted our bottom line. Other expense is primarily due to realized gains and losses caused by currency fluctuations on our working capital during a given quarter. Tax benefit was $1.7 million versus $0.3 million. The large benefit in Q3 of 2020 was due in part to option exercises, which had a favorable impact on our global tax rate. The 2019 results also included a benefit that resulted from the release of valuation allowance. While our tax rate can have big fluctuations on a quarterly basis for a number of factors, we suggest you model 12% to 14% non-GAAP effective tax rate for future periods. Noncontrolling interest was $1.4 million versus $0.3 million. While this line can vary as well, we encourage analysts to model about 8.3% of net income for this line item as a proxy for the minority interest in ACM Shanghai held by PE investors. Net income attributable to ACM Research was $9 million versus $10.3 million. The currency and tax items contributed a net benefit of $0.3 million in the third quarter of 2020 versus a net benefit of $3.4 million in 2019. Net income per diluted share was $0.42 versus $0.53. If we exclude the currency items as discussed above and normalized tax at 12%, the apples-to-apples comparison is $0.40 versus $0.36. Now I'll review the balance sheet items at the end of Q3. Cash and equivalents were $92.2 million, up from $86.4 million at the end of Q2. The quarter-on-quarter increase was due primarily to net cash provided by operating activities and a higher draw on our line of credit. In addition to the cash balance, we also had trading securities of $24 million on our balance sheet related to our SMIC investment. This is treated as a current asset as we were locked up for a year from the initial share purchase date. Short-term borrowings were $28.3 million, up from $25.8 million at the end of Q2. Total inventory was $64.2 million, up from $49.7 million at the end of last quarter. Of the total, finished goods inventory increased to $23 million from $17 million at the end of the last quarter. The $6 million quarter-on-quarter change represents a net increase of first tools that have been shipped to customers for valuation. Note that finished goods inventory is carried on ACM's balance sheet at cost pending customer acceptance and future revenue recognition. Year-to-date, we have spent a total of $16 million on Lingang-related investments. This includes $9.3 million for the lab rights and $7 million in deposits for employee housing. In addition, we've spent $3.7 million in capital expenditures. We anticipate another $9 million to $10 million of Lingang facility CapEx and employee housing in the fourth quarter for a total of $29 million to $30 million of total CapEx in Lingang-related spending for the full year. To conclude, we are participating in the growth of major new IC fabs, ramping production, and we continue to develop and deliver innovative products. We're optimistic about our opportunities in China and expansion outside of China. And we remain committed to achieving our mission to become a major player in the semiconductor equipment market. Let's open the call now for any questions that you may have. Operator, please go ahead.

[Operator Instructions] Our first question comes from the line of Patrick Ho from Stifel Nicholas.

Congrats on a nice quarter and outlook. David, maybe first off, in terms of the market environment. You've obviously posted very strong shipment and revenues in the September quarter. Can you discuss with your customer discussions, whether you're seeing an accelerated shift of a localization effort? And how that's potentially helping you as you look at 2021 as a whole? Are you seeing more chipmakers come to you as the political tensions rise and the effects of that for your business?

Okay. Patrick, thank you. Okay. For the -- this year, Q3, we have very strong and quarter shipment. And also, we see to continue that trend in Q4. And also, we have good indication even in the first half of the next year. However, as we normally give a projection of next year, normally by early January, so probably do those next year guidance by the time. Again, this is a real -- I see there opportunity here. We have our China fab continued investment, and our major customers continue committing expansion fab. And we will also see that DRAM recovery maybe at some point next year. And also do -- we do have a new customer and add in our customer base. And also we'll see there also new products either qualifying, like ECP, semi-critical 3D cleaning tool and also Tahoe, including also our recent vertical furnaces. And we'll see probably multiple contribution from those other -- above products. By end of Q3, we'll have about a $40 million deferred revenue in the end of the Q3. So Mark, anything you want to add on that?

No, I think you covered it well. Patrick, if you have another question? Yes.

Yes. Mark, my follow-up question more for you. So you mentioned that inventories went up primarily due to the inventory you were building for some of your evaluation units. Given that there's still a little bit of disruption in the supply chain-related to COVID and the ability to procure parts, other equipment companies have talked about just building, I guess, standard inventory for parts given the increase in demand. How -- can you just give a little bit of color of whether you're building any inventory for your general core product lines? Whether you need to do that as well? Or has the supply chain basically opened up enough where you feel comfortable in the procurement of key supplies and parts?

Yes. No, thanks for the question, Patrick. Yes, so first on -- you did call out a lot of the inventory uptick was from demo tools. So that was a big factor. And we carry those at cost. And those are really a number of tools that -- they are range of tools that our customers are evaluating. And typically 2 to 4 quarters, we'd expect to take revenue on them. In terms of our overall chain, it's -- there's always work to be done on that. We did see some lead times with some items got a little longer. But we're working really closely with our suppliers. We don't feel like we're really built any additional inventory because of any potential tightness. The inventory that we may have built up was really just in front of a good ramp that we expect next quarter.

Our next question comes from the line of Charlie Chan from Morgan Stanley.

So again congratulations for your great execution and also your clarification about the JCAP -- the short selling reports. I think that is very helpful. So as usual, I still want to follow up your progress at the top-tier customers for leading logic/foundry and also the U.S. memory accounts. Can you give us some update there?

Great. Again, we're still continuing working with the leading customer, right, and probably both in Taiwan and also in North America. And also, I should say, there we're making progress. And especially one of the leading customers, they're very familiar with our tool. And we're talking about for the demo tool. And hopefully, by end of this year, we can receive that demo of -- demo tool, then we deliver probably next year. And eventually probably take another 6, 10 months for further qualification. And meanwhile, as I said, we're still working with multiple other customers in North America and also in Taiwan. And we believe next year can be another exciting year for us to penetrate in top-tier customer. And the reason I say that is we have a strong confidence, our cleaning tool, TEBO and Tahoe, and plus also has the customer higher interest for cleaning tool too. So again, time going on, and we'll see that progress.

Okay. Great. So David, so I think you must see that there's a big M&A announced that in terms of NAND considering to Hynix. And since the Hynix is the customer you have disclosed, do you think that is the kind of the tailwind for you to expand your business in NAND flash, I mean, from this merger?

Yes, definitely, right? I think obviously, this is -- I've heard this news, right? And that's positive in time. I heard that. Nothing really happened very rapidly. They probably will take a couple of years to finish all their completion of the MA. But anyway, since Hynix is our customer and also their fab or interfab located in a town in China. So we see the good positive sign for us and to get into and -- this 3D NAND business. Plus, we have a lot of process build up in our 1TC in the Wuhan. So we are very familiar with our 3D NAND process. And we've -- as I mentioned, our fabs and our future Tahoe and also our even 3 semi-critical process tool also contributed a lot in the 3D manufacturing business. So it's a good sign for us.

Okay. And next, I want to follow up the question from the first speaker about the China CapEx. I know you cannot guide for 2021 for the time being. But in terms of the China CapEx for 2021, do you think the CapEx size is going to be larger than this year because there could be some challenges? For example, SMIC already had around USD 6 billion to USD 7 billion this year. So it's going to be a tough comparison for next year. And also, I heard that there could be some scrutiny about China memory projects because there were some projects that weren't that successful or ROI was too low. So what do you think about the China CapEx size for 2021 compared to this year? And what would that mean to your 2021 growth?

Okay. So, so far -- and I think our customer, like 1TC and Huahong, and also our new -- added new customer, including DRAM customer too, a very, very good plan indication next year. And that's why we see there good indication for the first half of next year, and continue expanding. Regarding SMIC, obviously, at this moment, we are not sure what's going on, right? And is that to be released? What I call it loose of the license for the '20 to [indiscernible] or not, we don't know yet but we are really carefully watching the progress. See -- in this moment, we still can supply our tool to the SMIC. So we're expecting those situations to improve and they can build in their 20 NAND in Beijing, and that's something we expected in expansion, if all this license problem is going to solve, right? So we'll let Beijing cautiously watch our progress, right?

Okay. And lastly, I'm not sure you can talk about this here. But what is the expected market cap of your China subsidiary, for the IPO?

Oh, wow, that's a good question. Again, we are in the sensitive period. We cannot comment on that. But one thing, you look at our market cap in the non-stock and -- or you're looking at other semiconductor company in the stock market, right? Those peer NPE ratio is a multiple of the U.S. So anyway, we have, I should say, positive and -- expectation and -- for us to be good pricing and IPO, right, reasonable good pricing and balance of the company and also balance the investor interest.

Our next question comes from the line of Suji Desilva from ROTH Capital.

Congratulations on the progress here. So a couple of specific questions. I mean on the Ultra C Tahoe product, you've had success in the foundry segment. Is the memory customer base looking at that aggressively? Or will that take longer?

Okay. Actually, Tahoe product, we are shipping 3 product already, right, including the first one, and this all comes through the foundry repeat order customer. And so they like the tool and they like this product. That's why they gave us 2 additional repeat orders. And we do have a good conversation and engagement with multiple memory customers and also another foundry customer, too. So we did well at a multiple foundry customer too, by the way. So we think that the Tahoe tool will give our customer benefit in terms of the control, the chemistry, consumption, CAGR at least 80% or more. And also, at the same time, provide improved performance. So well, we expect to see more customers add the tool, and we're also expecting to give a good contribution for our revenue next year.

Okay. And my follow-up question is, could you update us on the China analog customer that you announced last quarter? Also the U.S. OEM partnership? Those 2 new announcements last quarter. Any update there?

Yes. Okay. I think there, as I said, we do have our 2 new customer in the analog and power devices. And we delivered to and especially to the one of those customers. Another customer, we'll probably delivered to Q1 next year. And there also, we have our, I call, OEM customer in U.S. and the tool. We're already qualify their process. And I think they like our performance in terms of cleaning. And I hope this is cleaning capability, where we'll add -- is the benefit to be enhanced their tool quality. So we are working very well.

Our next question comes from the line of Donnie Teng from Nomura.

My first question is regarding to the assumption of your 2020 guidance. So in the point 4, you mentioned about your outlook assumes limited contribution in Q4 from SMIC. Can I have some more colors on this assumption? The reason is because I think not all the equipment or material suppliers received U.S. government's notification on not shipping any equipment to SMIC. So just curious about if we are a little bit too conservative to assume we have limited contribution in Q4 from SMIC? Or is any other reason behind?

Okay. Actually, we have a good delivery in Q2 and Q3 for SMIC. And we consider probably this year, the contribution from SMIC could be maybe 10% to 20%, in that range. We'll not see -- for next year, we don't know. But so far, our -- all the deals we've seen so far, all the request mix so far will keep on schedule, right? And so as a matter of review next year, how much they are going to do their expansion, probably well, just I said, watch carefully and maybe cautiously the progress. So for next year, we're not going to put too much count in the projection for the SMIC in our next year's projection. Maybe things are changing. But anyway, at this moment, we'll cautiously project revenue contribution for next year.

Okay. So David, sorry. So I just rephrase what you say. So basically, we have gained quite meaningful shares at SMIC in Q2 and Q3. So in Q4, probably the momentum is temporarily slowing down maybe due to customers' sales recognition schedule. But another thing I would like to clarify is that -- just wondering, have you -- have SMR received any notification from U.S. government or not? So if we don't receive anything, does that mean we can continuously ship into SMIC as long as they are still investing into the capacity expansion?