ACM Research, Inc. (ACMR) Q4 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the ACM Research Fourth Quarter 2018 Earnings Conference Call. [Operator Instructions] I must advise you that this conference call is being recorded today, 7th of March 2019. I would now like to hand the conference over to Mr. Gary Dvorchak. Please go ahead, sir.

Good morning, everyone. Thank you for joining us on today's call to discuss financial performance for the fourth quarter and fiscal year 2018. 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 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 Interim CFO; 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. Those risks are described 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 other financial results that we will provide in this call will be on a non-GAAP basis, which excludes stock based compensation. You should refer to our press release for our GAAP results and reconciliations between GAAP and non-GAAP amounts. With that, let me now turn the call over to our CEO, Dr. David Wang, who will begin with Slide 3.

Thanks, Gary, and welcome, everyone, to today's call. With completion of first full year as a public company, I'm now even more confident in ACM's mission to become a major player in the semiconductor capital equipment business. We believe we are in a great position to participate in a build-out of a next generation of fabs for years to come. We have technology leadership, proximity to large customers in Asia and we have recently expanded our production capacity. We have built a solid foundation with important semiconductor customers who are deploying our tools at a scale in some of their major and most advanced production lines. Our growth is driven by share gains in a $3 billion market for single wafer cleaning tools. We have again shared with new customers, new product and the penetration of additional production steps. We also believe our opportunity will increase as industrial moves forward to more advanced nodes and three dimensional architectures. Our 2018 results demonstrate excellent progress toward our strategic objectives. In the fourth quarter, we delivered strong revenue, profitability and cash flow from operations. For the full year, we grew revenue by 104% to $74.6 million, driven by robust customer demand for our tools and crisp executions. Our product differentiation, improved production scale and expanded operating leverage drove non-GAAP gross margin of 46.2% and non-GAAP operating margin of 13.2%. We generate $6.9 million in cash flow from operations and ended the year with more than $27 million of cash. Total shipments, which including two deliveries but not yet fully recognized as revenue were $95 million, up 137% from $40 million in 2017. In addition to strong financial results, we made a significant operational progress in 2018. We solidified our position and major customers. We successfully ramped production at our second factory. We delivered a significant number of first tools in the second half of the year, and we introduced our newest major platform, Ultra-C Tahoe. Please turn to Slide 4. With more than 20 years of history at ACM Research, we're often asked what is driving our business growth now? We attribute our success to: number one, our differentiated and patent-protected technology; number two, timing in the industry. Our customer face real cleaning challenge at advanced nodes. Our breakthrough moment occur with industrial founder traditional cleaning technology to be least effective at a process node starting at 15 nano. Even the tiniest defect began to hurt production yields. We believe our innovative megasonic cleaning process offers perfect solution. Tools with our SAPS technology can remove this tiny defects uniformly across entire 12-inch wafer and deliver better yields. The industry is now taking notice. Our first major SAPS customer, SK Hynix, placed the production order in 2011. They improved yield by more than 1.5 percentage points by using SAPS for just 2 cleaning steps in their DRAM fab process. In 2015, we added 3 more customers, SMIC, Huali and YMTC all with fab near our Shanghai headquarters. This customer is intending to use our platform beyond DRAM into 3D NAND, Foundry and Logic. We appreciate our customer base as they consistently push for improved production and put us at the forefront of resolving their most pressing industrial challenges. Please turn to Slide 5. While our customers deploy our tools to drive their own yields, we often collaborate to deliver new technologies. This interaction combined with the talent and creativity of our Shanghai-based world-class engineering team developed to commercialize our TEBO technology in 2016. TEBO is a different approach to megasonic cleaning. It extends our technology to remove unwanted particles from 3D structures, such as firm fabs, without damaging. We delivered our first TEBO tool to Huali in 2017 and recognized revenue in the same year. We work very closely with our customers and have made a great progress in further developing TEBO technology for optimizing process conditions. We believe it is early days for TEBO, which we expect to become more important as industry broadens its use of vertical structures. In a similar manner, we introduced our third major platform, the Ultra-C Tahoe, last August. Tahoe is the first of its kind that uses 1/10 of the sulfuric acid of competing single-wafer tools. We estimate that Tahoe can help our customers save an order of $10 million a year for typical 100,000 wafers per month DRAM fab. Beyond the cost saving, Tahoe meets the environmental requirement of modern fab around the world. Tahoe is another example of our focus on differentiated, patent-protected product offerings. I am pleased to report that we delivered our first Tahoe to a important strategic customer in January, and a technical evaluation is on schedule. Also feedback for Tahoe has been quite positive from both existing customers and potential new customers. They are very interested in the combination tool, which can integrate the chemical saving of Tahoe with a single-wafer cleaning benefit of fab and TEBO. We believe the Tahoe tool will become a mainstream product to solve today's and future challenges faced by customer for post-CMP cleaning and post-edging cleaning when moving to advanced nodes. Adding it all together, on Slide 6, we estimate that our full portfolio of SAPS, TEBO and Tahoe addresses more than 1/2 of the 3 billion single-wafer wet-cleaning market. We also offer a family of tools for back-end wafer assembly and packaging. Customers for this product, including Technologies. Our product line includes coater, developer, striper, scrubber, edger and plating tools. We believe the back end presented good opportunity for the post-Morris law era. The industry is pushing for increased cheap performance with more advanced packaging solutions. Our engineering team has been very productive, working on several new innovative solutions in the space. The first, which you will hear more about soon, is a brand-new tool with a unique ACM electroplating technology. We believe this tool will be hit as it offers significant performance advantages versus competitors. One of our first packaging customer who has a number of tools in production has placed multiple production orders for this tool. With our newest electroplating technology, we are on the track for delivery in the coming months. We now want to provide an update on our new factory shown on Slide 7. During 2018, we opened our second production facility. The factory is a new leased building around a 10-mile from our Shanghai headquarter. The new factory has 50,000 square feet of production capacity. This complements our original factory, which is located at our Shanghai headquarter. The factory ramped from a very small output in Q3 to more than 40% of our tool production in Q4. We expect to ship majority of our production to the new factory in 2019. Our original factory will be used for small tools and advanced development activities. We believe the new factory and our ability to scale production will support our efforts to win new large customers in the future. Now I will address our performance in light of a recent spending trend in the broader industry. Despite volatility in semiconductor industry, capital spending, we delivered solid growth in 2018. [indiscernible] following orders before and after the Chinese New Year holiday, we're looking forward to another year of solid growth in 2019. As discussed on our last call, most of our customers are in a early to middle stage of the multiyear investment to expand capacity. With their production ramps based on hitting internal year targets, we have orders and a firm forecast for specific projects from several of our top customers, which we expect to contribute in 2019 and beyond. Let me now turn the call over to Lisa, who will discuss our Q4 and fiscal year 2018 financial results in more detail.

Thank you, David, and good day, everyone. I will review financial highlights, and then turn it back to David to provide our 2019 outlook. All comparisons are against the same period last year unless I state otherwise. As a reminder, the financial results I'm discussing now are non-GAAP which exclude stock-based compensation. First, highlights of the full year 2018 show on Slide 8. Revenue was 74.6 million, up 104%. Total shipments were 95 million versus 40 million in 2017. Gross margin was 46.2 % compared to 47.2% in 2017. Non-GAAP operating margin was at 13.2%versus 6.4% a year ago. Non-GAAP net income was 9.9 million compared to the net income of 1.3 million in 2017. Other income in 2018 was positive 1.3 million versus a loss of 0.8 million in 2017. The income in 2018 was due to our 5.7% decline in Chinese renminbi versus the dollar during the year. For the fourth quarter, revenue was 20.8 million, up 21%. Growth was driven by solid demand for our single-wafer cleaning equipment. Total shipments were approximately 32 million compared to 13 million last year. And the 32 million last quarter total shipments, including tools shipped and recognized as revenue in the quarter plus shipments pending customer acceptance. Gross margin was 49.6%, which was above our normal expectation of 40% to 45%, due to our favorable product mix. This compared to 53.4% a year ago and 44.5% in September quarter. We expect gross margin to vary on a quarterly basis due to our product mix and the manufacturing utilization. Operating expenses were 7.1 million, up from 5.5 million in the same period last year and up from 6.5 million last quarter. Growth in operating expenses was driven primarily from R&D as we increased investment in new product offering. Operating income was 3.2 million versus 3.7 million a year ago. This resulted in operating margin of 15.5% compared to 21.5% in the same quarter last year and 16.5% last quarter. Other income was $42,000 due to a small impact from currency fluctuation. Net income was 2.9 million compared to the net income of 3.3 million last year and the net income of 4.3 million last quarter. Stock-based compensation was approximately 0.6 million. Now I will review the balance sheet. We ended the year with 27.1 million in cash. Cash was up 8.9 million from last quarter and the 9.4 million from last year. We ended the year with 9.4 million in short-term borrowings, down slightly from last quarter and up from $5.1 million at the end of 2017. Now let me discuss inventories. We ended the year with $38.8 million of inventory. Importantly, finished goods inventory grew to $6.5 million, up from $10.1 million in the third quarter and $4.9 million at the end of 2017. We view the finished goods increase as a positive indicator as this reflects the deployment of additional first tool systems to potential customers. Cash flow from operations was $9.6 million for the fourth quarter and $6.9 million for the year. Capital expenditure was $0.1 million for the quarter and $2.1 million in 2018. I will now turn the call back to David to discuss our outlook.

Thank you, Lisa. And please turn to the Slide 9. Again, we are pleased with our 2018 results. While we are monitoring trends in a broader semiconductor market, we have received strong orders and production forecast from our customers. We are excited by our business prospects and remain committed to gain the share with new products, new customers and more production steps. For 2019, we expect revenue of $100 million, up 34%, reflecting strong demand from our existing customers. In conclusion, we are executing our strategy. We are participating in the ramp of major new IC fabs. We are ramping production at our second factory, and we continue delivering innovative new products. We remain committed to achieving our vision of becoming a major player in the semiconductor equipment market, and we're looking forward to delivering another strong year in 2019. Let's now open the call for any questions that you may have. Operator, please go ahead.

[Operator Instructions] We have the first question coming from the line of Mark Miller from The Benchmark Company. Please go ahead.

I just was wondering, in terms of the $100 million you're expecting for next year, is it you're going to be front-end, back-end loaded, or is it going to be more even? And what percent of that $100 million you feel you have strong commitments on in terms of current orders?

Okay. Great. Thank you, Miller -- Mark. And actually, our $100 million revenue projection, I think, is still around 90% from the front-end customer, probably 10% from the back-end packaging customer. And at this moment, we see there a strong demand from existing customer. We're probably already heavily loaded in partial Q1 and also Q2, Q3. And I can explain our top customer, SK Hynix, the continued expansion their manufacturing fabs in Wuxi. And also our YMTC customer expanding their 20k 3D NAND in our production line, too. And also, Huawei, Huahong and also they're expanding their fab 7 in Wuxi city of the Jiangsu province. And also we're glad to see that we received order also from SMIC in 40-nano technology line. And plus, as I mentioned, we introduced our electroplating technology into the packaging application. So that's another future revenue growth engine for us in the back-end applications.

Mark, it's Mark McKechnie here. And I just wanted to add a few things to David's answer. On the visibility, it's driven by three things as normal, right? The orders that we got both before and after Chinese New Year. So we got good solid orders. Our customer forecasts coming in pretty nicely. And then also the acceptances. If you look at our finished goods inventory of $16.5 million, if you kind of look it with the -- take a normal gross margin, you can see there is some pretty good revenue opportunity there. In terms of seasonality, throughout the year we don't really talk too much about all the quarters, but Q1 we do expect to be up year-on-year, but to be down sequentially from Q4. Thanks.

Okay. I'm just wondering, R&D took a big jump up. What are your expectations for R&D in 2019?

R&D expenses roughly will be running about at 20%.

Sales.

In terms of sales.

Yes, actually -- yes -- and we're continuing looking for the new product and new R&D. At this moment, we're not trying to maximize operation margins. So we're trying to redevelop the new product and the new requirement based on the customer demand. So that's all I must say this year.

In terms of mix and what you're seeing in your orders, is it a higher mix in terms of margin, same type mix? Or just I was wondering about what you're seeing and what you feel are your strong commitments in orders in terms of the mix and the impact on margins?

Well, actually, looking at our general guidance, our margins were between 40%, 45%. I think probably this year, it would be in a range of 40% to 45%. Even last year, we were 46% achieving so far. So that's probably our projection.

And finally, excuse me.

Go ahead if you have one more question. Sorry, Mark, about that.

Any impact, any response from competition in the cleaning space? You've seen any reaction on the part of your competitors to your growth?

Well, again, we're -- this moment, our space, as our core technology stand for the SAPS, TEBO and the recent use of the Tahoe product. And we do not see any competitors technology who are competing with our performance. And obviously, we're looking carefully, and we are trying to deliver our performance with our core technology and meet the customer requirement.

We have our next question coming from the line of Suji Desilva from Roth Capital.

The -- just a follow-up on Mark Miller's question. The luminary of the quarters, is the fourth quarter kind of back-end loaded year that you talked about when you IPO-ed? Is that no longer going to be the trend for you guys? Or is -- will that kind of come back at some point? Just to understand how the quarters play out in revenue.

Well, good question. I mean, looking at last year, our delivery is based on customer requirement. Especially, when we have our prodigy being sold in the mass production line. Those deliver mostly by seasonality control, more by customer fab requirement. So same thing this year. We're seeing a very similar pattern, almost close to last year, as I mentioned, in the beginning. And we have our Q1, obviously, significantly higher than same quarter last year and also probably lower than the Q4, I mean, last quarter, right? Then Q2, Q3, we see very strong demand there. And obviously, Q4 is far away, but we're also expecting a good, I call it, delivery in Q4, too.

And then similarly on the demand and visibility question. Are you seeing any of the macros issues of China tariffs impacting any of the forecasts or plans? It doesn't sound like you are but I just wanted to clarify that point.

Well, and I should say not much changing, right. As of this moment, I still see a strong demand from existing customers, which build our 2019 projection. We do see one customer delay of tool by one month. So not much difference. So that's what so far we feel in the market here.

And turning to the manufacturing area. You have the second facility here. Can you talk about the revenue opportunity for that facility at full ramp? And what the -- whether you've pulled in the schedule, whether it's ramping to schedule? And what kind of CapEx you think you'll have for 2019?

Great. So the new facility we're building right now is a total 50,000 square feet. Obviously, for the reach of the full capacity, the reach is $250 million per annual base, including our older facility about 100 million. So in total, our manufacturing capacity total, I should say, is 350 million. Obviously, this year, our projection 100 million, we'll probably get one third of our capacity right now. We're projecting maybe next two years or something in the future, we'll have to reach that full capacity.

And the CapEx, you think you might be spending in '19 given that these two facilities are up and running?

Good question. So CapEx, I think, we spend 2018 for the building of the manufacturing area, and since we have already finished almost 95% building right now, I don't think we'll spend more than last year probably much less than last year in the CapEx spending.

Down year-over-year. And then my last question's around the products. David, if I'm a customer that buys SAPS and/or TEBO and also the Ultra-C Tahoe, is there any kind of benefit for me of putting those two pieces of equipment both on the floor? Or is it just an independent buy one versus the other?

And I think the SAPS, Tahoe are pretty much independent, right. SAPS is about cleaning the fab wafer and normally no structure, tiny structure, on top. TEBO is a real cutting for the patent wafer with a real tiny structure, which is damage free. Tahoe is very interesting. Tahoe really, primarily, is building for sulfuric acid. They use 1/10 of the sulfuric acid as a general other competitive single-wafer sulfuric acid machine. But with our combination of hybrid tools, we definitely can put their SAPS and their TEBO in a single-wafer side to further enhance the particle removing efficiency. So -- answering your question, yes, Tahoe can be also incorporated SAPS and Tahoe in the cleaning margin. But all the 3 tools can…

Right. So you're going to plan and incorporate into a hybrid tool there.

We have our next question coming from the line of Christian Schwab from Craig-Hallum Capital.

David, how many new large future customers are you targeting?

Okay. Good question. This moment, right now, we work with 3 major customers -- big customers right now.

In addition to our existing customers.

Yes, in addition to our existing customers, right?

All right. Perfect. And then post-Chinese New Year, were the orders in line or better than what you would've expected?

I think pretty much in line, and just before the Chinese New Year, we have people or customers talk to us and [Indiscernible] at the final firm order has been decided after the Chinese New Year. So number wise, almost same as we projected, which is look in the Q3 earnings call where I mentioned $100 million. That number will be consistency with our projection and so far with our projection too.

Fabulous. And then my last question, I think you mentioned earlier when you were talking about your manufacturing capacity of having roughly $100 million then adding $250 million, and then being a -- roughly a third utilization this year, I think I heard you say that you could fill that capacity in the next 2 to 3 years. Did I hear that correctly?

Well, I mean, I should say, probably beyond 2 to 3 years, right? It's more than hard to predict 3 years down the road. But really, we think of an opportunity coming in the next 2, 3 years because number wise, it's hard to really predict it right now, right? Probably by end of this year, I can tell you next year's projection. It's hard to project 3-year, 4-year down the road.

Christian, Mark here. The one thing I'd just add to that is, as you know, David, your 2 questions -- your first and your last line up pretty well, right? I mean, if we want to be talking to some bigger-potential customers, we need to show them some capacity and that we can scale. I mean, the timing for them is who knows, right? But we're going to work to get them online as soon as possible.

[Operator Instructions] We have the next question person coming from the line of Patrick Ho from Stifel.

David, maybe just looking at your product portfolio and your exposure to the memory segment. You talked about some of the opportunities for TEBO in terms of 3D pattern wafers for the memory market where we're seeing more multi-patterning steps as well as 3D NAND. As the industry continues to move forward, especially on the 3D NAND side of things with more layers, how do you see the capital intensity trends, particularly for your products serving devices with more layers?

Okay. Great question, Patrick. I think the -- either 3D NAND or the DRAM, they have a multilayer or 3D structure in the device side. Like, for example, 3D NAND, you have just deep rear or deep hole making the 3D NAND. Those holes inside the cleaning and edging all kind of process, you need a certain agitation happen to enhance the cleaning efficiency. So I think megasonic is a perfect tool to provide such agitation or such cleaning efficiency for deep rear. So that's really one strong demand or our tool application in those specific applications. As we all know today's 3D NAND is about 64 layer, people moving to 72, maybe 96. Also as the people are projecting down the road, those layers can be as high as a 2056, even beyond. So as we have a deep rear, deeper structure, and this megasonic, SAPS or TEBO will definitely play a very important role to clean those deep changing rear structures. So we are very confident. We are very expecting this demand -- huge demand for our tools down the road.

Great. That's helpful. As my follow-up question on the Tahoe product, I know there is a lag between initial shipments to customers versus revenue recognition, when do you expect to, I guess, generate the first revenue recognition for those products?

Great. Actually, like you said is last -- I mean, Q3 last time call, we talked about probably shipping the Tahoe by the end of last year because of we did more testing and -- of the performance since the first tool, therefore, we're about to delay one month. And I think we're expecting those tools will be installed on time, and generally speaking, our first tool in customer side, anywhere between six months to one year. So we think that tool qualification will take that much time between six months and one-year timeline. So that's, in general, our practice.

One thing I'd add to that is if you look at our forecast or guide for 2019, we don't really have a lot of Tahoe in it for this year. We think it will contribute a bit more next year as we start getting acceptance. The other thing I'd say too, in the prepared remarks, David mentioned that we do have some additional customers and potential customers taking a look at the Tahoe. Really interested in the performance, and we actually feel like that could happen a little quicker than the TEBO.

Yes. Actually, we talked to every customer about Tahoe concept. They all love it. They all think about very good tool for [indiscernible] and good combination technology. So we have a very positive and expectation for this tool to be the mainstream product.

Right. And maybe one final question on my end. It's great to see the strong traction you're getting for your new products as well as the systems business you're having. But clean like edge CMP and a lot of the other segments have a strong services capability or nice revenue stream from that end of it. As more systems hit the field, how do you look at growing the services business, which I'm assuming can be really nice supplement to your systems business growth?

Very good question, Patrick. At this moment, obviously, our tools are not popular a lot as a big guy there in the market a long time. So this moment, our service revenue is still in a friction percentage, right, and less than 5% however, as our tool is more popular in the market, we do believe that would be very good revenue stream for the services portion. So as we place more tools in the market and we see that there is service revenue growth.

[Operator Instructions] We do not have any further questions at the moment. I would like to hand the conference back to Mr. David Wong. Please go ahead, sir.

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 upcoming investor relations events. Gary, please.

Thanks, David. On March 18, the Company is going to present and host one-on-one meetings at the 31st Annual Roth Growth Conference in Orange County, California. Entrance to the conference 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. You may now disconnect.

Thank you, sir. Ladies and gentlemen, that concludes our conference for today. Thank you for participating. You may disconnect now.