ACM Research, Inc. (ACMR) Q1 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the ACM Research First Quarter 2018 Earnings Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, Tuesday the 8th of May, 2018. I would now like to hand the conference over to your first speaker today, Mr. Gary Dvorchak. Thank you. Please go ahead.

Thank you, Operator, and good morning, everyone. Thank you for joining us on today's conference call to discuss the company's financial results for the first quarter 2018 and provide guidance for fiscal year 2018. We released the results earlier today, and they're available on the company's website as well as from Newswire Services. On the call with me today are Dr. David Wang, President and Chief Executive Officer, and Ms. Lisa Feng, Chief Accounting Officer. Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the company's prospectus and other documents filed with the U.S. Securities and Exchange Commission. ACM Research does not assume any obligation to update any forward-looking statement except as required under applicable law. Please note that unless otherwise stated, all figures mentioned during the conference call are in U.S. dollars. With that, let me now turn the call over to our CEO, David Wang. David?

Thanks, Gary, and thanks, everyone, for joining us on the call today. We came into 2018 with a significant business momentum, and that momentum carried through the first quarter. We executed against key initiatives across our business, delivering solid results. The revenue of $9.7 million was in line with our internal forecast, and we remain confident that we will achieve our revenue target this year. Visibility remained quite high based on the volume of the equipment orders received. Lisa will go over the details of our financial results shortly. Let's now turn our attention to potential highlights, operational highlights. Our [indiscernible] this quarter is R&D because our success is really driven by innovation. We're still a small company, so we can only win by having the most technologically advanced tools at a reasonable cost. We want to offer the best performance, best value proposition, and best service level to our customers. We do this through technical leadership, a function of our investment in R&D. The latest product our innovation pipeline is SAPS III wafer cleaning tool. SAPS III is a natural expansion of the SAPS-based product line. Each model is a single-wide wafer, a [ serious ] processing cleaning tool that can be configured to customer specs. We offer SAPS II with 8 chamber and launched SAPS V with 12 chamber. The SAPS III is also a 8-chamber tool, with higher throughput but 40% footprint reduction. SAPS III is aimed to [indiscernible] existing [indiscernible] that want to upgrade to more of advanced [indiscernible], and need more cleaning process steps but have limited cleaning room space. The exciting news is that a total of 4 SAPS tools are now being used in mass production at one of our key customers [indiscernible] business with a [indiscernible] referenced site operating with no problem. We expect SAPS III to help drive growth in our SAPS product line. Another development that assures our commitment to innovation is R&D center we just opened in [indiscernible] and a serviceable center in Icheon, Korea. Korea is a major market for us, with both key customers and good prospects. Additionally, Korea has a abundance of [indiscernible] engineers, with strong technical skills and meaningful industrial experience. This new R&D facility enables us to strengthen our R&D capability and build our engineering [indiscernible] in the region. We can better recruit local talent, support our customers, and performing new and R&D programs. Equally important is that new service support center positions us near potential customer in Korea, strengthening all our ability to win new customers in the region. In general, I want to emphasize that our success is highly dependent on our ability to develop and deliver innovative technology and meet our customers' challenging technical requirement. For this reason, we devote a great deal of financial and personal resource to R&D. Our R&D team is comprised of highly skilled engineers and technologists with expansive [indiscernible] experience in megasonic cleaning technology, cleaning process, and chemistry. Innovation through R&D is our strength. We will continue invest heavily in R&D in order to strengthen our compatible positions. We will provide the most efficient cleaning solutions for flat wafers and [indiscernible] cleaning solution for advanced 3D patent wafers. In addition to R&D, manufacturer is our strength and we are growing our commitment to being [indiscernible] manufacturers. Earlier this year, we announced that we're expanding our Shanghai manufacture facility. The expansion will include additional [indiscernible] space for product assemble and final testing. We are pleased with the progress. We are on schedule with the expansion, which is expected to be completed by the end of Q2 this year. Because we are optimistic about our opportunity in China, we believe expanding China makes strategic sense. Our decision to put production in close proximity to [indiscernible] a new Asia [indiscernible] should yield new customer and exciting growth for years to come. With new passing quarter, we are advancing toward our goal of becoming a global leader in advanced wafer-cleaning equipment. Let me spend a couple minutes reviewing some of the key strategics we are pursuing in order to achieve this goal. First, we intend building upon our leadership [indiscernible] leadership in [indiscernible] wafer cleaning. We continue to refine our [indiscernible] SAPS and TEBO technologies. Our focus is to address the multitude of cleaning challenges, and [ in counting ] during the chip fabrication process. SAPS stand for Space Alternated Phase Shift. TEBO stands for Timely Energized Bubble Oscillation. SAPS technology provides uniform megasonic energy distribution across the entire wafer, giving the best particle removing efficiency. TEBO controls how energy is applied to the bubbles in the megasonic cleaning process by better controlling energy input into the bubble or gas temperature. TEBO reduce the chance that a cavitation would damage the 3D structure on their patent wafer. With better control comes greater cleaning efficiency, which improves yield. As I discussed earlier, we will continue to invest in product development and to strengthening our global patent portfolio in strategic jurisdictions, including U.S., China, Japan, Korea, Singapore, and Taiwan. Second, we are establishing a referenceable customer base, historically in commercializing our SAPS tool. We have placed evaluating equipment with select customer. They would then purchasing additional tools, enabling them to add more cleaning steps to the manufacturing process. Similarly, we are using what we call [indiscernible] process for our TEBO product line. We have placed TEBO evaluation equipment with leading foundry and memory customers. We have recognized revenue from the initial sale of TEBO [indiscernible] equipment. The development of our staff and TEBO equipment has selected leading manufacturer industrial services to key [ propose ]. First, it validates our technology and equipment, and 2, it represents solid references and facilitate a short evaluation process for other manufacturers. Third, we continue to leverage our local presence to capture China opportunity. China is both the largest and a fast-growing market for semiconductors in next 3 years. 42% new SAPS were built in China. The market for semiconductor manufacturing equipment in China is expected growing hopefully in the next few years. Chief manufacturing in China require equipment that meets their specific technical requirements and prefer building relationship with local suppliers. We established our operation in Shanghai in 2006 and will continue to work closely with the chief manufacturer in China and throughout Asia to understand that their specific requirements [indiscernible] them to adapt our technologists and enable us to design high-quality products and the solutions to address their needs. We're committed to invest in sales, marketing and service support to expanding our customer base, both in Asia and the U.S., which will sustain our growing momentum for years to come. Finally, we actively manage our business throughout operational [ excellencies ]. We want to ensure continuous improvement of our key operational and financial matrix. We remain committed to our key initiatives in order to improving operational efficiency, meet our customer needs, and attain our financial goals. Before I turn the call over to Lisa I would like to once again thank the entire ACM team for their hard work, passion and dedication. We intend to be global leader in our targeted segment of semiconductor manufacturing equipment space. We are optimistic about the outlook, and looking forward to further building upon our success in the quarter and the years ahead. With that, I will now turn the call over to Lisa to discuss our 2018 financial results. Lisa, please.

Thank you, David. Good day, everyone. First, let me walk you through the detailed first quarter results. All [indiscernible] refer to quarter one 2018. All comparisons are with the same period last year unless I state otherwise. They are all non-GAAP financial results, all non-GAAP financial excluding stock-based compensation. Please refer to the press release for our GAAP results. Revenue of $9.7 million, increase 72%, was largely in line with our expectations. Selling prices were up substantially, as we sold a high volume configurations of our SAPS line. Growth margin of 52.7% was up from 42.4% a year ago and down from 53.4% last quarter. The higher ASP of the units sold resulted in the higher growth margin. Note that the growth margin was well above our normal range of 41% to 45%. Over time, growth margin will often vary due to either the mix of products or manufacturing utilization or both. Non-GAAP operating expenses were $4.9 million, up from $3.1 million in the same period last year and down from $5.5 million last quarter. The increase was due to higher R&D spending coupled with more spending on customer support. We exercise spending this plan to keep the rate of growth in operating expenses well below the revenue growth rate. Operating income was $0.3 million compared to the operating loss of $0.7 million in the same period of last year and the operating income of $3.7 million last quarter. [Indiscernible] non-GAAP was $0.6 million compared to net loss of $1.3 million in the same quarter last year and the net income of $3.3 million last quarter. Stock-based compensation was $2.2 million due to our higher stock price. Now let me cover the balance sheet. Our financial position remains solid. As of March 31, 2018, our cash position was approximately $15 million. In quarter one, we utilized $5.5 million for working capital as we built inventory in anticipation of fulfilling our growing order book later this year. We utilize a short-term bank borrowing of $5.3 million to cover most of the working capital needs. With that, I will now turn the call back to David to discuss our business outlook for 2018.

Thank you, Lisa. Over the last several months we received significant orders for SAPS-based tools, as well as advanced packaging equipment for our existing customers, which we had detailed in our press releases. We are very excited about our business prospect, as this order demonstrates how our equipment continued to gain traction in the marketplace. ACM now has a backlog more than $50 million in orders, the most of which I expect to be delivered to customers by the third quarter. A very high proportion of the shipment I expect to be accepted and recognized before the year-end. As we previously discussed, if we ship a new tool or it goes to a new customer, we recognize revenue on acceptance by the customer. For repeat order we recognize revenue upon shipment. Because of this, we have very good visibility. There are field tools out in the field ongoing acceptance, so we can't estimate with some precision when the associated revenue will be recognized. For 2018, we continue to anticipate revenue of approximately $65 million. This guidance reflects strong demand from our existing customers in China and Korea. All our customers in China and Korea are all building new [indiscernible] this year and will order cleaning tool in volume. Now let's open the call for any questions that you may have for us. Operator, please go ahead.

[Operator Instructions] Your first question comes from the line of Sujeeva Desilva from Roth Capital.

So in terms of the mix, David, can you talk about the mix of the 8-chamber tools versus the 12-chamber tools you'd expect and where the demand would be stronger of one versus the other to understand the mix?

Okay. I think at this moment we have a product sold in the 8-chamber, which is the [indiscernible] SAPS tool, and also SAPS III, also 8-chamber, and with the 12 chamber instead of 5. And this moment, and we can see the mixing of the portion between the 8-chamber and 12-chamber. As time's going by, I think there will be more 12-chamber we order, especially for the memory customer. However, 8-chamber tool like SAPS II or SAPS III, we think still [indiscernible] to be purchased by the memory customer.

Okay, that's helpful. And more broadly, David, in the NAND market, there have been concerns perhaps about customers slowing down capacity adds. The demand's been very strong for several quarters. Are you seeing anything from where you sit in terms of NAND demand, any fluctuations there, or is it still on track with your expectations?

We see the market still growing, you know, in our customer site, and obviously we see that. The momentum continues, even for going on end of year, even next year. So we're very positioned prepare ourselves to meet the customer requirement and for their [indiscernible] and also expecting our new TEBO result come out, and therefore [ require ] future of the new TEBO order too.

Okay. Good to hear. And then my third question is on TEBO itself. I believe you have one evaluation customer. I just wanted to confirm that, and then how long is the evaluation process or is it just an unknown range because it's a new product, in terms of time?

Okay, good question. And that really depends on the customer, their process going on. And as you know that we already have one customer accept the tool for the production, and there are a few customer [indiscernible] right now. So we'll still continue working close with customer, refine the process step and refine also their process [indiscernible], and we expect that those products will keep going and maybe still the end of this year and maybe begin next year. And so that we see there are customer may end up earlier, so that's our goal, and also we're working close and do our best, same as our customer.

Okay, that helps. And then last question. You've had 2 or 3 straight quarters where the gross margins have been at or above your target range. Can you talk about whether the target range is conservative or whether there are factors that might bring that back into the target range?

Sure. Actually, you look in that, our expectation for their growth margin is anywhere between 40% and 45%. It really depends on their mixing of their product, you know, high-margin versus low-margin. In general, so far we can see TEBO is most high-margin and the SAPS is the secondary, and the advanced packaging tool is the third, right, so it really depends on how the mixing happens and then we'll give the definite gross margin. And obviously last quarter and in Q1, this percentage is higher than our expectation, and again this really depends on how the product fluctuates or combination of the mixing. So we'll still say this moment our gross margin between 40%, 45%, as more of their advanced tool get put in the market, and then margin will be, you know, or next targeted goal between 45%, 50%, average, again.

Your next question comes from the line of Christian Schwab from Craig-Hallum Capital.

So as we look forward, David, with the enhancements of the products that we have, are we addressing a larger percentage of the roughly $2.7 billion single-wafer cleaning market going into, as that grows going into 2019 and beyond than we are currently? Is that fair and can you give us a rough expectation if there is any change you can quantify?

Again, obviously looking at revenue last year, $37 million, this year our projection is $65 million. Compared with $2.7 billion, there's still a long way to go. And however, as customer adapted a new of their advanced [indiscernible] manufacturing and also as more customer knowing our technology, and not even for the advanced [indiscernible], even [indiscernible], we see our technology, SAPS, TEBO can stay up high. So we are very exciting, optimist, very I should say optimistic about the future growth and you can see that is [indiscernible] grow and we'll continue looking for next couple years grow, like 2018, 2019, 2020. So it's real great time for us. It's also a great location for us because we are positioned very well in Asia [indiscernible] good opportunity, especially having China.

And then my last question, on the manufacturing facility in Shanghai, I know you mentioned it but I think I missed it. Is that expansion still expected to be complete by the end of Q2 and put you in a position to manufacture at a level of about 250 million a year?

Yes, that's good question. I think we already started contract as people put the [indiscernible] system, and also building a [ clean room ] environment, and there were still progress on the schedule, so again we still are planning to have all finished by the end of the Q2, and so we can start the manufacturing the tool of that. So it's greater manufacture base of expansion will cover our at least [ $25 million ] additional revenue capacity for us.

Your next question comes from the line of Mark Miller from The Benchmark Company.

Congratulations on the progress so far, especially the backlog of bookings. I was wondering if you could give me a little more color on the breakout between opportunities between NAND and DRAM in terms of what's under evaluation?

Okay. Yes, good question. And we're -- most of our manufacturers, and I [indiscernible] manufacturer tool, it's in their DRAM, right? Also logic. And for their 3D NAND process, we're actually work under customer and to put as our tool into their 3D for evaluation process. So we work with a few customer right now on this application. So, answer your question, most time right now our tool, it's sold the most under, I call it DRAM, and also logic, and also we're, say, probably this year, we'll have around 5 tool will be using for 3D NAND manufacturing.

As 3D NAND goes to 96 layers, what effect does that have on the number of cleaning steps? Do they increase by 50% or -- in terms of the number of steps as you go to 3D NAND with 96 layers.

Actually, to [indiscernible] case, this 96-layer versus 36-layer, that layer not much should impact cleaning process step, because those step, 96 or the 36, they always do it at the same time. However, we are building the 96-layer, that 3D NAND structure has the rear, right, so have a more higher aspect ratio. In this case, that a real cleaning become challenge as [indiscernible] 36-layer [indiscernible] and go to 96-layer maybe 3 time higher, including there have maybe shrink in the real size. That poses there challenges to the cleaning. Actually, our SAPS, right, TEBO, is the spec designed for clean those deep rear particle and [indiscernible]. So we expect that application will be perfect [indiscernible] for our product.

Okay. Just a couple housekeeping issues. I was wondering, you said you made a heavy investment, $5.5 million for working capital. What was the cash consumed in operations?

Okay, let -- ask Lisa answer for your question.

Operations is about $7 million.

$7 million was consumed?

Yep.

And then finally, I just want to confirm you, said you had several TEBO or a few TEBO tools under evaluation. Is that correct?

That's correct. We have a [ model ] customer, both memory, larger company, and work under evaluation of TEBO product right now.

[Operator Instructions] There are no further questions at this time. I would now like to hand the conference back to David. Please continue.

Okay. Thank you, Operator, and thank you all for participating on today's call and for your support. We appreciate your interest and looking forward to reporting to you again next quarter on our progress.

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now all disconnect.