ACM Research, Inc. (ACMR) Q3 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the ACM Research Third Quarter 2018 Earnings Conference Call. At this time, all participants are in listen-only mode. There will be presentation, followed by question-and-answer session. [Operator Instructions] I will now hand the conference over to your first speaker today. Mr. Gary Dvorchak. Thank you, please go ahead.

Good morning, everyone. Thank you for joining us on today's call to discuss third quarter financial performance. We released results after the U.S. market closed yesterday. The release is available on our website as well as from Newswire services. There is also a supplemental slide deck posted in the Investor portion of our website that we will reference during our prepared remarks. On the call with me today are: Dr. David Wang, President and Chief Executive Officer; Ms. Lisa Feng, Chief Accounting Officer and acting Chief Financial Officer; and Mark McKechnie, Vice President of Finance. Before we continue, let me remind you that remarks made during this call may include predictions, estimates or 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. You're cautioned not to place undue reliance on these forward-looking statements, which reflect the ACM's opinions only as of the date of this call. ACM is not obligating itself to revise or publicly release the results of any revisions to these forward-looking statements in light of new information or future events. Throughout today's discussion, ACM will present important factors related to its business that may affect its predictions. You should review our SEC filings for a more complete discussion of these factors and other risks. 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, who will begin with Slide 3. David?

Thanks, Gary, and thanks, everyone for joining us on the call today. Our business momentum continued in the third quarter. We delivered strong financial results. Achieved record shipments, introduced Ultra-C Tahoe project – product, and then began production at our second factory in Shanghai. Revenue more than tripled from the third quarter of 2017, and grew by 11% from last quarter. Strength was driven by continued demand and a great execution with additional contribution from a customer acceptance on an important evaluation tool. Solid growth, margin – gross margin and good leverage drove operating margin to 16.5%. We generated a positive cash flow from operations, and ended the quarter with more than $18 million of cash. Total shipments were approximately $32 million as measured by sale price. We have begun to report total shipments this quarter because we believe quarterly shipment information provides additional context for evaluating our operating results and the business prospects. Total shipments, including two main components, the first is a repeat delivery of tools that are recognized as revenue when shift. The second, as the first tool delivers for which we expect the revenue at a later date. First tool deliveries can be to either existing customer, who hasn't accepted that specific tool yet, for example, the first Tahoe tool deliver to the SAPs customer or to a brand new customer, who has never purchased a tool from ACM before. In each case, first-tool shipments remain on our books as a finished goods inventory, and are carried at a cost onto until customer accepts the product. And ACM recognizes revenue – first-tool shipment repeating represent a positive next step in our sales process. The opportunity shifts from high-level discussions, analysis and in many case we have a demo in our crew to a more comprehensive evaluation phase. The customer commits resources to confirm and validate the benefit of ACM technology in the customer own production line environment. This provides confidence that we are close to a sale of the first tool, and to establishing a relationship that could provide much larger business opportunity. Our second factory shown on the Slide 4 is starting up just in time to support additional demands. This factory is a true game changer, adding 50,000 square feet of available floor space on top of a 36,000 square feet at our first factory. We plan to ramp the new factory from very small output in Q3 to more than 25% of our total production in Q4. We are off to a great start. We have already delivered several machines built at a new factory in October, and early November. When we began ACM, it was our vision that new generation technology would be required as a semiconductor industry, moving to a more advanced nodes. Then in 2006, we locate our operation in Shanghai, China to be the need of Asia where we expect that some of the largest new fab to be constructed. Two decades later, we are even more convinced that our vision was right then, and that is right now. Results that find 2018 confirming our vision, including significant growth in total shipments and the revenue, the need for a second factory as a strong reception for our current and new product offering. To date, we have delivered more than 50 single wafer cleaning tool, mostly SAPS tool to leading large scale memory and logic manufacturers. We believe our patent megasonic leading technology provides the best method for removing tiny killer defect from 2D semiconductor wafers with increased effectiveness on the production nodes beyond 3D nano. Our customers have reported yield improvements range from 2% to more than 5%, depending on their number of cleaning steps that are using SAPS. We see several growth drivers for SAPS including: one, a continue ramp-up of our customer fab capacity; deployments of new of our SAPS technology into more production steps; three, the addition of new customer. We are optimistic for TEBO, which extend our technology to remove unwanted particle for 3D structure or FinFET without damaging. In addition to volume production units, we remain in detailed discussion with all of our customers. Furthermore, several other major semiconductor player are considering TEBO for their advanced 3-D cleaning requirements. On August 23, we introduced the newest addition from our innovation pipeline, Ultra-C Tahoe. Tahoe is a first kind of its kind, a unique cleaning tool that uses 1/10 of the sulfuric acid of a competing single wafer tools. We estimate the Ultra-C Tahoe platform can save more than $10 million a year for typical 100,000 wafer per month DRAM fab. Be on the cost saving, Tahoe meets the requirements of more than environmentally aware IC fabs from around the world including, Yangtze River in China and Icheon region in Korea. Tahoe is another example of our continued focus on differentiated and patent protective product offerings, which can expand our market opportunity and drive profitable long-term growth. We announced our first purchase order for the Tahoe evaluation tool and it is on a track for delivery in Q4. When we add it all up, we estimate that ACM now addresses more than 1/2 of the – 2.5 – $2.7 billion total single wafer cleaning market, with our SAPS TEBO and Tahoe products. We plan to further leverage our position as a key supplier to some of the largest fab projects in Asia, with a range of new product innovation in various stage of development. Before I turn it over to Lisa, I want to comment on our performance in light of our recent spending trends in the broader semiconductor space. While no company can be completely immune for the global semiconductor cycle, we are happy to report that demand remains strong. Our visibility extended well into 2019, as the several of our major customers are in early stage of multiyear fab projects. As one example, we have a good exposure to SK Hynix, who continue to invest in new fab through other cycle. Our net and logical [ph] customer are aggressively expanding capacity as well. In general, the CapEx plans of our customers are highly driven by the need ramping fab to scale. Most importantly, we remain committed to expanding our product offering, winning new customers and drive our technology into more production steps as industry move into more advanced process nodes and the 3D structures. I will now turn the call over to Lisa to discuss our financial results please turn to Slide 5.

Thank you, David, and good day, everyone. I will review our financial results for the third quarter and then turn it back to David to provide our update outlook. All comparisons are against the same period of last year, unless I state otherwise. As a reminder, all of the financial results that we provide on this call are on the non-GAAP basis, which exclude stock-based compensation, please refer to the press release for our GAAP results. Revenue was $23.2 million, up 374% from the same quarter last year. The significant growth was driven by SAPS II and the SAPS V products to our key foundry NAND and the DRAM customers. And the revenue recognized the – for the first two systems that has been in evaluation since later 2017. Total shipments were approximately $32 million for the third quarter of 2018, up from $11 million in the third quarter of 2017, and the $21 million last quarter. Total shipments, including products which were shipped and then recognized as revenue in the quarter for our first two shipment pending customer acceptance. We will continue report total shipments on a quarterly basis going forward. Growth margin of a 44.5% was leading our expected range. This was relatively unchanged from a year ago, but up from 41.8% in June quarter. As discussed on our previous calls, we expect gross margin to vary on a quarterly basis due to product mix and the manufacturing utilizations. Operating expenses were $6.9 million, up from $3.2 million in the same period last year, and up from $6.2 million last quarter. Operating income was $3.8 million versus the operating loss of $1 million a year ago, operating margin was a 6.5% up from 12% last quarter, and the negative of 19.5% in the third quarter of 2017. Other income was approximately $0.9 million for the quarter. This line item represents realized gains and losses in our working capital due to currency fluctuations. The gain was higher than normal due to a 3.8% decline of Chinese renminbi versus the dollar during the quarter. This contributed about $0.04 to our reported non-GAAP earnings per share number of $0.23. Net income was $4.3 million compared to the net loss of $0.6 million last year, and the net income of $3.4 million last quarter. Stock-based compensation was $0.4 million. Now moving to our balance sheet highlights. We ended the quarter with $18.2 million in cash, up approximately $0.8 million from last quarter. The increase in cash was driven by disciplined working capital management, and the [indiscernible] $1.4 million in cash flow from operations. Capital expenditures was approximately $0.9 million in the quarter, bringing our total to $1.9 million year-to-date. Spending for the first phase of our second factory is largely completed. We ended the quarter with approximately $10 million in short-term borrowings, essentially unchanged from last quarter. Total inventory grew by $2.3 million from last quarter to $29.8 million. We show on Slide 5 that the change was driven by a $4.6 million increase in finished goods, which close to quarter two at $10.1 million, up from $5.5 million in the second quarter. We view the increase in finished goods is a very positive indicator as it reflects the deployment of the additional first two system to potential customers. To clarify, our finished goods balance represents costs of all the first two systems, which have been shipped but not yet recognized as revenue. I would now turn the call back to David to discuss our outlook.

Thank you, Lisa. We turn to the Slide 6. We are pleased with our third quarter results. While we are monitoring trends in a broader semiconductor market, we have recently received strong order and a production forecast from our customers. We are excited by our business prospects, and remain committed to gain share with the SAPS people, new product, new customer and a more application production steps. We are thrilled by initial production ramp of our new factory, and have update our outlook to reflect our view of the business. For 2018, we are, once again, raising our full year revenue guidance. We now expect a revenue of approximately $74 million, $4 million higher than our previous guidance. This represent 103% growth for the year and reflects strong demands from our existing customers in China and Korea. In conclusion, 2018 is shaping up to be a fantastic year. Our financial performance have been excellent. We are participating in the ramp of the major new fabs. We have began reduction at our second factory, and we are delivering innovative new products. We remain committed to achieve our vision of becoming a major player in the semiconductor equipment market. And we are looking forward to deliver another strong year in 2019. Let's now open the call for any questions that you may have. Operator, please go ahead.

Thank you. Ladies and gentlemen, we’re now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Suji Desilva from Roth Capital. Please ask your question.

Hello, David, Lisa, Mark. Congratulations on the progress and profitability here. It’s very nice job. So in terms of the – David, I know you were confident on the call by your customers and the demand profile. But something you talk about the visibility you have into 2019. And if there are just any customers, any pockets where you're seeing hesitation pause due to either memory pricing weakening or macro tariffs just to understand if those isolate into that? Or whether all of your customers are kind of proceeding forward as expected?

Yes, actually, our exist – four customer and they are very, as you say, spending there new fab manufacturer is on the plant. I can give example, SK Hynix, they pretty much opened – expanded their fab in Wuxi in the first half of next year. And then our customer once you see, they continue expanding their Phase 2 in the middle of the next year. And partly, also they are probably building another new fab in Wuxi in the middle of next year, and also continue their Shanghai fab second phase expansion probably starting from Q3, Q4. So I can see that all our existing fab, our customer and they are continually spending, as I mentioned in the call, because of their – they have multi-year product expansion. Also their demands or their yield determination for their expansion. So we are very positive. And demand is strong from our point of view.

Yes, I mean, Suji, you asked if there was – yes, Suji, Mark here. You were asking about that have we seen any pause from anybody. We haven't seen that. I mean we're paying close attention to the cycle, like everyone else is. But we checked with them, I mean we've gotten some recent good indications from our customers. So we understand your question. But we're not really seeing any cycle related pauses in our customer base.

Okay, good to get that color. And then on the metric you got, giving now the shipment number, I appreciate that detail, is this a number you'd expect to fluctuate quarter-to-quarter as customers plans come in ebb and flow? Or is this the number that you think would more likely steadily increase as you see your customers ramping, and perhaps you grow your customer base?

Yes, actually, looking at next year, right? Where customer give us forecast, as I mentioned, pretty much Q1, Q2 timeline most likely, this SK has expansion. And mid of the year, and once if we continue expand there. So we'll say it probably kind of balanced out. Obviously, I cannot say averaging in all four quarters. Was a pretty much balanced revenue and for next year.

Yes, I'd add – Suji, on the shipment side too just to add a little color there. Yes, this is the first quarter we reported it. We're going to continue to report it on a quarterly basis. I think we did a good job of explaining what it is. But it could be lumpy. I mean we see some pretty good strength in the back half of this year, the next couple of quarters as we ramp our factory. But we certainly wouldn't – we don't want to too excited if it's a big number, and we don't want to be too excited if it's a small number either.

Thanks for providing context around shipments, Mark. And then lastly, the newer Tahoe product. It sounds like you're going to ship your first quarter in the first quarter. Will that be a revenue immediately upon on shipment? Or is that an acceptance process? And can you remind us what the ASP of the Tahoe machines are relative to your average SAPS TEBO – SAPS ASPs rather?

Yes, actually, again, that's by our revenue recognition rule, right? This is a – actually the new product to our existing customer. So we're not a recognizing revenue almost upon acceptance. So we expect a tool delivery in Q4, but then record revenue probably next year and that's our planning. And then the pricing, obviously, this is a technology. And I think the pricing, well, we're still in the pricing initial tool because of benefit offered to the customer, especially saving the chemistry. So we think what we offer greater good gross margin for us, for the tool.

Okay, congratulations again, guys. Thanks.

Thank you. Our next question comes from the line of Christian [Schwab] from Craig-Hallum Capital. Please ask your question.

Hey, congratulations on a fabulous quarter. Could you walk us through the competitive environment? And who you are gaining market share versus in the marketplace?

Well, I mean, it's a very sensitive question, right? I don't want to mention the name of the competitor, right? I mean, let's put it this way, we're almost gaining everybody's share at this moment personally, all right? You know the big guy in the market. And our product for the – of our application of front end of their application. We also have a product in the back end of our application. So we're gaining for each of the big guy's market share at this moment, right? And then, plus, as I mentioned, our SAPS TEBO, which is our cleanest smaller particle, which is the – other people cannot provide such a performance. And plus, we're looking for other, make it Tahoe project, that's all for excellent environment protection, much less chemical consumption. And then we see that as it will be taking – we think about a more of a customer attraction. And then provide a more of the customer benefit, right? Taking through the market share from the – one of the major competitor, I don't want to mention name here. Did I answer your question?

Yes, that's fine. Thank you – thank you, David. When you're competing, can you just remind us what you believe your yield improvement rates are versus the competitors as you continue to gain traction and share in the marketplace?

Well, that's great. Good question. Actually, as I mentioned, our first tool sold to the SK Hynix. And that time it was more tiny company, and they made a very straight requirement, you got to have show them performance, which is yielding poor, right? That's initial product and get a sale. And at this moment for memory wise and DRAM, and wherever I should say close to a 20 step, and there has been improve – the yield improved. So put it together and there we estimate accumulated yield improved is more than 5%, right? A real data number, and probably, either we cannot detail – I mean difficult it's here. But obviously, as it gives us the more geometry, we you go to their one time. And that is more geometry DRAM manufacturing, we're expecting our tool and will offer more process step and offer more accumulative yielding improved.

Okay. Can you remind us how many tools you could – if you had all of the market share, how many tools you would – you could ship to say, an SK Hynix for every – you pick a number 25,000 or 50,000 wafer starts per month, what the total opportunity for new fab construction is?

Well, I mean, roughly, I'll say that is at this moment. And again, DRAM will be manufacturers as a total high of Hynix selling wafer per months, right, that's a full scale. And if we take that number as calculation, and I think our tool will be anywhere between the small measure say 10 to a 20 tool, that's requirement. As more of advanced requirement keep going on. They maybe need more. So that's our ballpark range right now.

Congratulations again on solid execution. No other questions. Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Mark Miller from The Benchmark Company. Please ask your question.

Let me add my congratulations to your report. Just wondering if you can give us an update on how evaluations are going. Any news there, especially for TEBO?

Okay. Well, evaluations keep going, all right. As I mentioned there is the one tool that is in production, wherever additional few customer evaluating our tool right now. And we're probably expect another, I should say, order may come in soon. We expect a lot come in. And as I mentioned, this new technology, we need take time to try to get our production improving. And there we expect this to take time. And that's the one for TEBO. And for the big Tahoe, I can comment that is, Tahoe project we already put a highly R&D this year. And we're going to ship in their first tool in the Q4 timeline. So we're expecting probably next year become their evaluation period. And there the same time, we have expecting multiple customer interest about this tool, and hopefully, you can catch a few customer next year to start to implementing our Tahoe project. And in next time, next year.

You have positive cash flow this quarter, you're ramping this second facility. In terms of cash demands in the future or most of the cash demands for the new facility behind you? Or do you have to make more investment?

Actually, looking there fab. Our second in fab right now, we are already finished the full construction. And this moment, we pay the almost two-thirds of the spending as remaining one-third. And as not that heavy because we're – we have rented the house. And we have probably remaining roughly $0.5 million to pay for that. Again, this is a new facility, and we continue ramping our production in other site. Regarding the cash flow, and we can tell you that is we have controlled our collection and also receivable very efficiently. And this moment, we're happy with so far our cash flow in last quarter, and also for the next year. And also where can see that ramping our revenue increase next year. We also will gather additional bank credit loan from the bank. Roughly good supporting our growth for next year. And this year, as I mentioned, we're – our short-term loan about $10 million. And so we're moving to increase our line credit and to possibly around the double of this $20 million. So that's our goal right now. So Lisa anything, I wonder, add a comment on that.

I think our cash position is very strong. And in addition, the AR collection, we have a great relationship with multiple banks, credit facility is available for us to funding our growth.

So just one final question. Foreign exchange helped you out by $0.04 this quarter, any feeling how foreign exchange is going to impact you this quarter because there's been some movements recently?

Yes – no, Mark, thanks for bringing that up. So we kind of when we encourage the analyst just to assume wherever it closed, kind of assume it's flat for the quarter. And every quarter, we'll breakout how much impact positive or negative we get. So the renminbi has weakened a little bit quarter to date, so we'd expect that to – continues to help us slightly this quarter. But in general, we're not in the business of forecasting where that goes but will be certain to tell you when – and kind of break out how much impacts us.

Thank you.

Thank you. Our next question comes from [indiscernible]. Please ask the question.

Yes, I just wondered if you could give me an idea as to the run rate that you did in the quarter you reported yesterday versus the upcoming quarter. Is there going to be a dramatic difference in terms of earnings per share and the sales? Is there any seasonality to – with the quarter?

Yes, so this is Mark here. Just – so we did a little over – around $23 million here for Q3. We guided the year for $74 million. So if you look at what that implies for Q4, it's got us at about $20 million, right? So we're planning for – and that's kind of where we're guiding for The Street to be. Gross margins, we expect to be in our normal range 40% to 45%. So that's about as much as we guide you on. But yes, so our expectations for around $20 million of revenue in Q4.

Got it.

Let me also add an another shipment. Or as a – as we projected is also new product shipping in the Q4. So also extra new delivered tools where we ship out another record revenue upon shipment. Will be that add additional new shipment too. Just like Q3 we did.

Okay. Is there anything that you can do to provide more exposure for the stock? It seems to be undervalued here in $10 range. Got a couple of analysts. Are there any meetings that they...

Yes, look, we're open to suggestions on that front. But all seriousness, we understand the cycle has been a little bit weak as well. And so we're just running our business. And we'll let Wall Street take care of our stock.

Well, I see that as a – like Mark mentioned, right? We run business. And where in 2019, we think is another growth year. And this moment, and we're baseline playing costs about $100 million next year. So obviously, detail – more of a detailed guidance, we'll give you maybe the Q4 earning call. Because that we see the three driving factors regarding price of order so far on hand. And also the customer forecast, as I mentioned, for our major customer. And also have expand customer acceptance for the first tool is shipped in the second half of this year. So we have a very confident next year revenue. And then we do our job, and let the market reacting for our stock price.

Okay. Thank you.

Thank you. [Operator Instructions] There are no further question at this time. I'll now hand the call back to David Wang. Mr. David Wang, continue.

Okay. Thank you, operator. And thank you all for participating on today's call and for your support. Before we close, Gary is going to mention some upcoming investor relations events. Gary, please.

Thanks, David. On November 14, we'll be presenting and hosting one-on-one meetings with the ROTH Technology Corporate Access Day in New York City. And on the 15, we'll present and host one-on-one meetings at the Craig-Hallum Alpha Select Conference also in New York City. On November 29, we're going to host meetings at the Benchmark Discovery One-on-One Conference in Chicago. Attendance at these conferences is invitation only, so please contact your respective sales representative if you want to attend or schedule one-on-one meetings with us. Thank you all again. This concludes the call, and you may now disconnect.

Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.