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

Good morning, and good afternoon. I'm Tim Arcuri. I'm the semiconductor and semi equipment analyst here at UBS. Pleased to have ACM Research. For our next session, we have Mark McKechnie, who is the CFO, who -- I've known Mark for a long time. So thank you for joining us, Mark.

Yes. Thanks for having us here. Not a bad time of the year to be in Phoenix.

Yes. For sure. So maybe we could just start with the somewhat obvious topic of discussion, the recent export controls, a couple of your subsidiaries got put on the list. How do you think about all of that and how it impacts the company?

Yes, you bet. No, thanks, Tim. Good afternoon or good morning, everybody. So we've been -- we're no stranger to this, right? It's -- we got -- there's always some kind of regulations hitting. But I think I would start out, make sure everyone recognizes that ACMR, we were founded in the U.S. in the late '90s, right? So we started the company here in the U.S. and then we set up a subsidiary in 2005, 2006. We really got put on the map maybe 2010, 2011, when we started scaling up a special type of cleaning tool, our SAPS tool, which helped SK Hynix with their 45-nanometer products. And then we scaled our whole subsidiary is where significantly all the growth has been. So at this point in time, last year, close to 95% of our business was from Mainland China. And these regulations just hit, let me kind of dig in to some of those. I think the big kind of the first takeaway is what were they? 140-some-odd companies got added to the entity list. I think a good number of those were equipment players in China. So we're not aware that -- we weren't notified of any specific wrong doing on our part other than we supply customers in the China region. So the tricky part, I think for everybody, it's going to be some additional challenges for our supply chain going into China. And so we're assessing that as now it will take us a while to kind of work through that. I think maybe 1.5 years ago or so or when the regulations first hit us in 2022, we commented that maybe 5% to 10% of our supply chain came from the U.S. And so what I can tell folks is that us and the industry, we've had some time to localize our supply chain, kind of move around. And we've had COVID. We had the earlier restrictions and so the industry has adjusted to that. Again, we're going to have to manage through that. We're not down to 0 coming from the U.S. But I think us and the industry will have to manage through that. The other piece I'd say is what happens to the overall spending of China Inc, right? And you probably want to dig in a little bit on China WFE. And so we could -- even if our tools, we can continue to build and what have you, we'd also have to pay attention to the impact from our customers, from the rest of the supply chain.

So let's actually talk about China WFE. Then I want to talk about some of your products. But let's just talk about China WFE. I think certainly, however much you think is down next year, it wouldn't be as impactful for you because your portion of that wouldn't be down as much as if you're a domestic U.S. guys that's banned. But how do you think about domestic China WFE next year just as a whole and as it impacts ACMR?

Yes. And big picture, and I think you've talked to a number of other suppliers that supply into China. I think everyone is talking about the headline numbers being down next year, right, for WFE in China. And I think I also heard some commentary that the 2024 number had some prepurchasing, right? People knew about these restrictions coming we don't think necessarily there was prepurchasing of our tools, but we think there were other tools that were prepurchased. So whatever the headline number that comes out for 2024, our sense is that it would include some prepurchasing. So headline number next year, perhaps down. And before these regulations hit, the new restriction hit, we were planning for growth based on continued market share gains at some of our customers. So we have a couple of pretty important product cycles kicking in, where we've got products, but it's been very limited revenue. And then we're also working to develop our international business, which is still a pretty small part of our overall revenue outside of China. And so we'd look for some contribution for that.

So you think even if I just take what the big -- some of the companies who have talked about it, KLA just today is talking about domestic China being down low 20s and others have said down mid-teens, and we're down sort of mid-teens plus as a firm for domestic China. So would you say the domestic Chinese equipment companies are a relatively small portion of that 20%, give or take, of that domestic China number. Would you say that the domestic China and you being within that. So the question is, do you think that still grows even if the overall number is down.

Yes. It's -- I think it's possible. Yes. I do think that's possible. I think that's some of the signals you're getting from other, the suppliers in there. Again, these regulations are 2 days old, right? So it's hard to predict that. But prior to the regulations, that's clearly what our view was.

Yes. And how much -- just last question on that, how much domestic localization, I don't want to say pressure, but that's not the right word, but how much incentive is there for the domestic Chinese chip makers to localize with domestic Chinese equipment companies?

I think it's pretty high now, right, with the regulations, it's certainly gone up a bit. But the nature of the industry, you always want your suppliers to be as close to your facilities as possible, right? And over the past 5 years or so, we've been through the COVID restrictions, right? And so I think during that period, our subsidiary had a capital raise in China, and we've managed to really gain a significant amount of share and grow into different product lines. So the localization push, I think, is kind of natural, right? In general, your supply chain needs to be near some of the fabs that are going up. And the combination of COVID and the restrictions probably add some gas to that fire.

Great. Can we talk a little bit about your tools? I think I want to make sure people know that your tools are not just me-too copycat tools by any means. And you have a lot of innovations in clean and plating. And so I just wanted you to talk about some of those things and maybe some of the technologies that you are the most levered to?

Yes, you bet. Thanks for that question. The whole culture at ACM is really -- we're driven to build, the 2 main driving factors are building world-class tools, we just so happen to grow our business in China, but always focused on IP and developing state-of-the-art world-class type tools that can help our customers in China, but also have an attach rate to the global market. So the second piece ties to that. The company is kind of uniquely structured, again, a U.S. parent company founded here in the U.S., our subsidiary grew in China. But we are squarely focused on the global market. And so I think the last major trade war with Japan, right, was -- when they were building out DRAM and they tried to build some local DRAM capabilities. A couple of equipment players, the whole ecosystem really scaled up, and then they managed to take that international. Our business plan is pretty similar, rhymes with that, scale a business where we had the traction in Mainland China. But we've gotten a lot of active efforts right now, and we're hoping that we can scale up our non-China business over the coming years.

And you have -- I think you have about 35% market share of the China cleans market, something in that range. And obviously, as we go to smart geometries, the cleaning intensity is going up, can you talk about maybe some of the particular parts of the cleaning market that you're going after, I think the sulfuric acid part of the market, which is dominated by a particular Japanese supplier. I think that's an area that you're kind of going after. Maybe you can double click on that?

Yes, you bet. So cleaning is our legacy, right, that's where we started. That's kind of where we got put on the map early on with our SAPS tool. And so it's a little over 70% of our business last year, and we scaled. We came at it from the high end with the megasonic cleaning, Tahoe, TEBO and SAPS. And we moved into semi-critical tools as well. We scaled that out a few years ago. And at this point in time, cleaning our core market is -- we cover about 90% of the steps. So we feel we can go head-to-head with any of the major -- the Japanese players and what have you with our product offering. You've mentioned sulfuric acid. We've had this Tahoe tool on our road map for a while, right? We've been talking about it, perhaps even before our U.S. IPO in 2018. This past quarter, we announced a pretty major breakthrough with Tahoe, and we're pretty optimistic about the future for that. Essentially, this Tahoe tool has got a great ESG component to it, whereby sulfuric acid, when you move from below 28 nanometers from mature nodes down to below 28, you have to move from batch mode to single-wafer clean. And so the consumption of sulfuric acid goes up by perhaps a factor of 10. And so just moving to single wafer, you start mixing it together a lot of that sulfuric acid is wasted and you have to dispose of it. Our Tahoe tool fixes that with the hybrid solution where we have a tank batch mode where we do the sulfuric acid cleaning, and then we keep the wafer wet and we move it into the single wafer ultimately, we consume 75% less sulfuric acid when you start moving to the more advanced nodes. And so the breakthrough we had was, our performance was always not quite up to par with the single wafer competitors. And what we announced this past quarter was we're at parity with that. So now we get the same performance with the ESG benefits and we're seeing -- we've got a handful of tools that are major China customers, and we're seeing pretty good demand internationally for that.

And this is something that like screen, for example, I see [ Kenji ] here in the audience. But this is something that screen can do?

I mean let them talk about it. I think it probably have a different approach to save on the sulfuric acid side. But the hybrid approach, we feel that we've got good patents and protection on that, yes.

Great. Can you talk also about your furnace tools? I think you're gaining some traction also on the furnace side.

Yes. Furnace is -- we've delivered a good number of demo tools over the past year. So we've got evaluations. Revenue for that has been pretty limited to date. So we're anticipating. We've got a pretty good range of products on that front. But we're looking for that to contribute some more meaningful revenue in 2025 as we get some acceptance and repeat orders for shipments.

And then on the ECP side, it seems to me like there's a big opportunity in advanced packaging, I mean huge. So maybe can you talk a little bit about that?

Yes. So plating, our ECP line, we've got both front end and back end, actually ACM was originally founded when it was founded in the U.S., that was the target, the original target for the company. I think when David founded the company then, we weren't able to commercialize some of the tools immediately. And so that's when he set up the subsidiary in Shanghai. But he was told that the technology was 10 to 15 years, forthcoming. So last year, I think we scaled that to close to 20% of our business. So we had a good strong product cycle. That was a combination at front end and back end. We've been focused on the whole shift though to advanced packaging. We've been talking about that for close to 5 years. And so we recently announced 3 new products, a portfolio of products for the panel level packaging and cleaning to address that market. So we're feeling pretty positive about the potential for that business.

And how back to the domestic China market, I think there's not a firm edict from the PRC government, but I think a suggestion or a push that 2/3 of equipment lines be sourced from domestic toolmakers. I mean, obviously, there's areas that they can't source domestically litho and inspection. But basically, that says that everything beyond those 2 markets, it can get sourced domestically. So that's a pretty big headwind to -- and I asked Applied and Lam about this all the time. It's a very big headwind for their business if the PRC can really push this. So do you feel that when you win what component of it -- and I know that you're a leader in terms of technology, but how much are the Chinese chip makers are they buying based on technology most of the time? Or how much do you think that this push from the PRC to have domestically sourced companies comes into it?

I mean it's really hard to say, Tim. I think it's a good question. From our perspective, the whole firm is really focused on building world-class tools and not me-too type products. And so -- and really since our eye is on the global market, it's -- we're 100% focused on building differentiated products. So might be some. I think during COVID, it was tough for some of the competition to get in and out of China, I think, for the obvious reasons. So our teams were able to kind of work closer with our customers and build out some additional product lines. So it's really hard to say exactly how much. But for us, we're really focused on. We don't want to win business that way necessarily, right, we want to win business on the merits of our products.

Yes. Got it. I think a few months ago, you set out a $3 billion long-term target in terms of revenue. What are the underlying assumptions to that? Is it like based on wafer fab equipment, like a certain wafer fab equipment market size, a certain share for you, and is there a time frame that you would expect that to...

Thanks for bringing that up. So I think it was a couple of quarters ago, we had previously said $1 billion target, and so of course, we were getting close to that. And so we updated that to a $3 billion target. That would split $1.5 billion from Mainland China and then $1.5 billion internationally. And the assumptions behind that within the China market are easier to get to, right, because it's -- that's most of our business now. And so we break it down. We look at from our core marketing cleaning, I think we've got about 30%, 35% share now. And within Mainland China, our target is 55% share, similar type numbers for plating. If you move down the line for furnace, PECVD, Track, we have lower market shares to get to that number because we just haven't scaled the business yet. But hopefully, we could do better on that. So within China, it's based on market shares within those. And it's based loosely on a $30 billion WFE for China, Mainland China. And then outside, it's really based on -- it's really just starting to -- some of the evaluations that we have with some of our major customers in Europe over here in the U.S. And Southeast Asia, it's starting to convert those into orders and production commencement.

Great. How much does your strong presence in China help you win customers beyond China. I know you have a new demo lab and R&D center, I think, in Oregon. You have a lot of headcount in Korea. How does your presence in China to help you win outside of China?

Well, I think ultimately, we'll put our R&D team and ultimately our production near our customers, right? It's that kind of industry. And so -- thanks for bringing that up, our Oregon facility. Back in October, we bought a 40,000-foot facility with a nice clean room, kind of we're building up a services team, right, to service U.S. -- additional U.S. customers and the rest of the world. But yes, it's a big deal, right, to bring demo tools, our own tools into the clean room, and even some additional R&D outside of Mainland China.

And I think Hynix has been bright spot for you beyond Mainland China. Is there something particular about Hynix's evaluation of suppliers or something that has made you have so much success.

So SK Hynix's #2 DRAM player, right? They were our first major customer, right, through our SAPS tool back in 2010, 2012, some odd. So there's a long history with us in SK Hynix. We've got some tools in their Korean facilities. Most of our revenue for them has been -- was to the Wuxi facility. And so we're working pretty aggressively to penetrate their Korean operations. And as you noted, we have a good team in South Korea, engineering team. We have production facilities, demo facilities. And so we're hopeful that will convert to a business with -- additional business with SK Hynix.

And I think in Taiwan, you have a couple of evals and you're pushing some opportunities there. Is there any impediment you being seen as a domestic Chinese supplier or having a big exposure in domestic China. Does that help you in Taiwan? Or does that hurt you in Taiwan?

That's a great question. I think we want to win wherever -- whichever customers we deal with, the goal is to help our customers build better chips, right? And so you bring world-class tools to them, we think you can get through any of the -- hopefully, the political challenges.

And I think -- I just want to go back and talk about advanced packaging. I think it's, I don't know, 5% of revenue, something like that. today. I mean we've seen everyone is talking about this -- what are some of the competitive differentiators for you and are you working on like large panel packaging or just wafer level?

So yes, and it's been a business -- it's always been kind of smaller business for us. They're smaller tools, coder, developers, chippers and the like. But we also have plating as well. And I think having plating and the other small tools and the technologies, we think, is important. In terms of -- I think some of the -- and we do have a whole panel level packaging product line that we've announced. So Tim, I'm the CFO, the money guy, so I probably won't be able to add too much more on the differentiation side.

Yes, I guess just -- I mean, we've seen acquisitions from both Applied and Lam, they bought companies to sort of bolster their large panel opportunities. Do you have a panel level offering today? Or is that something you have to go out and acquire?

No, we do. We announced 3 product panel level tools over the past several quarters and specifically on the advanced packaging line.

Can you talk about gross margin? I mean, you've consistently -- I think last quarter, you -- I was looking at the financial year, maybe 50%, 51% last quarter. And you said your long-term target is 40% to 45%. Why 40% to 45% long term and your 51% now.

Yes, for us, I mean, it's been a -- good news, right? I think it's a good indicator of our technology that we bring in kind of our cost structure. Our gross margins are really based on our product mix, right? It's within our cleaning tools, plating and even packaging, there's a whole range. And so we've been fortunate that our mix has been skewed to the upper end, and we've done a good job of our cost structure on some of our semi-critical tools. I'd say of perhaps half of the upside versus our target could be from the product mix. We've also had some currency benefits. A lot of our tools are priced in dollars. And as you know, a lot of our costs will be in renminbi or Asia-based, so that's helped us a bit. And so the 40% to 45%, I think we encourage folks, if you're looking at our long-term gross margin profile to think about us in that way.

Great. So my understanding was that I think ACM Shanghai currently pays a dividend, I think, to Shanghai shareholders. But I think the CEO recently noted that a dividend to U.S. shareholders is not in the plan. How do you think about that?

Yes. Tim, thanks for bringing that up. So where people come to on us -- so first off, that is correct. ACM Shanghai does pay a dividend to its shareholders and 82% owner. So we get a nice piece of that. And so that's a nice cash flow for our U.S. operation. In terms of a dividend to the U.S. I think what people are getting at is the market cap of our ACM Shanghai subsidiary is close to $7 billion, right? And so our U.S. market cap is about $1 billion, right? So we own 80% of that. It's about a 5:1 discount, right? So we're getting $0.20 on the dollar for our paper value. So I think investors and us included, are looking for a way to, can we monetize that, will we ever be able to get that money out. And so we get asked about, will we pay a dividend to the U.S. shareholders. And ultimately, it's about can and when would we sell those shares. And look, we're in it for the long run as a majority owner of ACM Shanghai. We believe it's possible to sell a few shares here and there and then bring that back to the U.S. We don't see any challenges to doing that. We have publicly announced our subsidiary that they're planning a primary capital raise. And so that's in process right now. And so -- that's probably our first priority. But following that, if that discount remains, we believe it's possible to sell a little bit of that stock and bring it back to the U.S.

This was -- I mean, this has not always been the case, but I -- and again, I don't cover it, but I always think of this as being a topic for the company because this has been a -- this has been there to varying degrees for a while. So why hasn't the company tried to take money out of Shanghai already?

So first off, there was a 3-year lockup, right? So from the IPO of the ACM Shanghai back in 2021, there was a 3-year lockup that was -- that actually came past due in November of this year, right? So either November 18 or 21, I believe it was. So that lock up. But there's other factors there, but that's technically lifted. And so that's a big reason why we haven't really considered that up until now. And then at this point in time, it's possible. It's -- we're just -- we're really more focused on the capital raise in Shanghai, and then perhaps we take a look at this after that.

I guess how much of it comes down to -- I mean, sure there's the valuation arbitrage, but you're also in growth mode, too. So you probably want to focus on investing in the company and...

So what would we do? Like if we did raise capital there if we sold -- so yes, the first use of proceeds would, of course, be to grow our business. The $1.5 billion target outside of Mainland China, we're going to need capital to grow that. And so we would want to use that for acquisitions or to grow the business.

Yes. Okay. And then maybe can you talk about just with respect to some of the competition, like who do you see as being particularly tough for you to overcome in some of these markets?

I mean there's some strong players, right? We're just a small player that's grown pretty well over the past 5 years or so, but we're still a fraction of the size of some of the major players in each of our core product areas, right? It's -- there's a different group of competitors in cleaning versus plating, PECVD, Track, it's a broad range, and we're kind of running into some bigger players for sure.

And is there -- are there any other aspects of the story we talked about plating. We talked about furnace. I mean furnace is an area that seems -- some of the U.S. suppliers have -- I don't want to say, like disengaged from that market, but I think that there's other focuses for Tokyo Electron and some of the other players in that market. So how do you think about where as everyone is going in one direction, you can sort of like backfill in some of these areas.

I mean, it really feels like we hit on most of those, right? I mean, within cleaning, there's some potential product cycles for us ahead, within plating and kind of extending that to the panel level packaging is a great opportunity for us. And I'd say PECVD and Track or pretty new platforms for us. We're kind of an alpha beta mode on those. So 2025 is going to be more valuations kind of broadening the customer base on that and hopefully converting that to revenue in '26 and beyond.

And I guess last question, do you have any efforts in adjacent markets? I mean, you're mostly focused on depth and etch and clean. Any opportunities in any of the other markets, materials maybe, I don't know.

Not that I'm going to announce today here, Tim.

Yes. Okay. But I mean those are in theory, those are areas you could go into too, so.

So yes, if you look at the sum of the tools that the areas that we've kind of identified, it's about $16 billion. So it's -- we have some work to do to grow into that.

Great. Okay. Well, Mark, thank you for the time. I appreciate it.

Great. Thanks, Tim.

Thanks, everybody. Bye.