ACM Research, Inc. (ACMR) Q1 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, thank you for standing by. And welcome to the ACM Research first-quarter 2019 earnings conference call. [Operator instructions]. I will now turn the call over to Mr. Gary Dvorchak, managing director of The BlueShirt Group Asia. Mr. Dvorchak, please go ahead.

Good morning, everyone. Thank you for joining us on today's call to discuss financial performance for the first quarter 2019. 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 on the investor portion of our website, that we'll reference during our prepared remarks. On the call with me today are Dr. David Wang, president and chief executive officer; Lisa Feng, chief accounting officer, and Interim CFO; and Mark McKechnie, vice president of finance. Before we continue, please turn to Slide 2. 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 under risk factors and elsewhere in ACM's filings with the Securities and Exchange Commission. Please do not place undue reliance on these forward-looking statements which reflect ACM's opinions only as of the date of this call. ACM is not obliged to update you on any revisions of these forward-looking statements. Certain of the financial results, we 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, David Wang.

Thanks, Gary. And welcome everyone for today's call. We are off to a greater start to 2019. It is the momentum to continue into the first quarter. We delivered a solid revenue growth, excellent profitability, and we introduce key new electrical plating or ECP products. First-quarter results demonstrate the competitive strength of our technical expertise. Product differentiation and the production scale. Revenue would double from the same period last year, solid operating leverage grew gross margin of a 43.1% and operating margin of 14.6%. We ended the quarter with more than $27 million of cash. Total shipment which include tools deliver another year recognized as revenue where $14 million, up 40% year over year. In addition, portfolio of the financial results, we made a good operational progress in a quarter. Orders were quite strong, and we completed all planned to delivers. At SEMICON China to a show in March, we launched two products with unique ACM electroplating technology which I would talk more about a moment. Now I will highlight three operations achievements. From the first quarter, we go to slide 4. First, we deliver our first Ultra-C Tahoe evaluation tool to an important strategic customer testing is unplanned and we are on track for customer acceptance later in the year. Because of the environment and the cost benefits, we are now seeing tremendous interest in Ultra-C Tahoe from three other major customers, as well as several new prospects. Tahoe is an excellent example of our focus on differentiated patent protected product offerings by using one tenths of sulfuric acid typically used by competing single wafer cleaning tools. Tahoe meet the environmental requirements more than facts around the world. Reducing the use of sulfuric acid also delivers tremendous cost savings. We estimate that Tahoe can help customers saving around $10 million a year for typical hand use single wafer per month. Feedback on Tahoe is quite a positive. We believe the Tahoe will eventually become a mainstream product that will solve the challenges faced by a customer or post empty cleaning and oppose the action clean. We move to advanced notice. Second, we introduce two electro- plating products at SEMICON China in March. This will show on Slide 5. Their first product is the Ultra ECP AP, AP stands for Advanced Packaging. AP is the backhander assembly tool used for bumpy or plain copper, tin, nickel to wafers at the die level before packaging. The ultra ECP AP deliver more uniform mantle layers and a match area by incorporating our proprietary technologies. This advanced technology solution delivers a better yield, greater efficiency, and a higher throughput due to the fabrication process. Furthermore, Ultra ECP AP, also support a wide range of packaging solutions including Caterpillar, soda bump, redistribution layer, fan out application, [indiscernible]. We also introduce our Ultra ECP MAP. MAP stands for Multi Anode Partial Plating. This new tool is used in front and wafer fabrication process and use our proprietary technology to deliver water cost electrochemical copper plating for copper interconnect applications. The ECP MAP offers improved gas feeding performance for plating ultra thin seed layer. This is a mission critical for advanced nodes at a 14 nano, 12 nano [indiscernible]. We're excited about this new ECB tool. They demonstrate our commitment to technology leadership by delivering innovative proprietary high-performance products in single wafer cleaning solutions. We believe in advanced palladium markets represent a great growth opportunity for us, and we are in great position to capitalize. Market acceptance of the new plating tool is already promising. In Q1, we received the repeater purchase order for two Ultra ECP AP tools, from one of our major packaging customers. And our first tool purchase order for Ultra ECP MAP from our key foundry customer. We deliver the one of this tool in the first quarter by a week's back to the deliver, the other two tours in the coming months. Beyond this new electro-plating solution, our engineering team remains productive and are working on additional new products as we show on Slide 6, innovations through research is our strength. We are standing upon our investment in our need in order to further mounting our competitive need. So stay tuned for more exciting new product announcements from us in the quarters ahead. Third. Our new Shanghai factory is remaining as a plan as shown on Slide 7. A common date for majority of a new production in Q1. For comparison in Q4, the new factory handle 40% of our production. Based on the ramp, we expect the new factory will be made to full support on demand in Q2 and beyond. We intend to ship substantially all our production to the new factory over the course in 2019. All regional factory will be used for small tools, and advanced development activities. Going forward, we believe our expanded capacity and our ability to scale production will support our efforts to win new large customers. Our new factory shows our commitment to scale capacity which will help us achieve our goal of becoming a major player in the industry. Before I turn the call over to Lisa, I want to say a few words about the broader industry. We are monitoring the spending trends in the industry just like everyone else. While semi-industry capital spending is a volatile, we are optimistic about another year of solid growth in 2019 based on orders from our customers. We have orders and their firm forecast tied to a specific products and as several of our top customers. Most of our customer are in early though a stage of multi-year investment to expand the capacity. They're ramping up based on the internal production plan, so less impact by cycle. For example, one PC is using our tool of how to improve yield in a 3D NAND production line and it is being ramped. Another example is a body which is in their MID meters of planned multi-year capacity expansion. On [indiscernible] we're actively fulfill order as we speak. Furthermore, we believe we can dampen the effect of the cycle by delivering new products and adding new customer at all stage. Today, we have plenty of room to grow over 3 billion addressable market. To conclude, we have excellent position dissipate in a build out of a next generation fab for years to come. We have a technology leadership proximity to large customer and a production capacity. We have a build a solid foundation with a strategic semiconductor customer who are deploying our tools at a skier in some of their most advanced production line. And we expect to win new customer around the world as industrial progresses to more advanced nodes and a three dimensional architectures. Let me now turn the call over to Lisa, who will discuss financial results in more detail.

Thank you, David. And a good day, everyone. Our review of financial highlights and then turned back to David to discuss our outlook. All figures are the first quarter and all comparisons against the same period last year. Almost I state otherwise. As a reminder, the non-GAAP financial results I'm discussing excluding stock-based compensation for reconsideration of the non-GAAP financial results to the most directly comparable guide financial results. Please see last night earnings release. You will find it posted in the Investor Relations section of our website. The reconciliations are also including as exhibit to the current report on a Form 8-K that we filed with the SEC yesterday. Please go to Slide 8, where we will start with the revenues. Revenue was $20.5 million, up 110%. Growth was driven by solid demand for our single wafer cleaning equipment and our back end tool. And we had a customer acceptances at a first the tools that had shipped in prior periods. Total shipments were $14 million, compared to the $10 million in the year-ago quarter, and the $32 million last quarter. Total shipments including tools shipped and the reorganized as a revenue in the quarter, plus shipments pending customer acceptance. We expect a significant increase in shipments in the second quarter based on solid demand for the repeated and the first two deliveries. Gross margin was 43.1 which was with our normal expectation of a 40% to 45%. This compares to 52.6% a year ago, and the 49.6% in the December quarter. Gross margin was elevated in the prior-year period due to our high concentration of a certain SAP two tools which commanded higher margins. We expect the gross margin to continue to vary on a quarterly basis due to product mix, and the manufacturing utilization. GAAP Operating expenses was $6.6 million, down 6% from the same period last year. Non-GAAP operating expenses were $5.9 million, up from $4.9 million in the same period last year, and they're down from $7.1 million last quarter. Growth in the operating expenses was driven primarily by R&D, as we increase investment in a new product development. GAAP operating income was $2.3 million, compared to our operating loss of a $1.9 million in the first quarter of 2018. Our GAAP operating margin was 111%, compared to -19.5% in the same quarter last year, and the 13% last quarter. Non-GAAP operating income was $3 million versus $0.3 million a year ago. The resulting of a non-GAAP operating margin of a 14.6% compared to 2.8% in the same quarter last year, and the 15.5% last quarter. Other expenses was $261,000 due to the foreign exchange impact of our working capital of the stronger R&D versus the dollar. GAAP net income a treatable to ACM Research was $1.9 million, compared to the net loss of a $2.8 million last year, and the net income of $2.3 million last quarter. Non-GAAP net income was $2.6 million, compared to a non-GAAP net loss of $0.6 million last year. And the non-GAAP net income of a $2.9 million last quarter. Stock based compensation was approximately $0.7 million. GAAP net income per diluted share was $0.10, compared to our $0.18 loss in the year-ago period. Non-GAAP net income per diluted share was $0.14, compared to $0.04 loss in the year-ago period. Now I will review the balance sheet. We ended the quarter 1 with $27.4 million cash was essentially flat quarter over quarter. We ended the quarter with a $12.8 million in the short-term borrowings, outperformed $9.4 million last quarter. Now let me discuss the inventory. We ended the quarter with a $42.3 million of inventory as expected finish a good decrease to $13 million, compared to $6.5 million in the fourth quarter. The decrease was due to customer acceptances exceeding the first two shipments during the quarter. Cash flow from operation was a -3 million, the cash flow was due to primary to the increase inventory intended to fulfill strong quarter to demand. We also use cash to do this to deal with payables. We expect a positive cash flow from operation in quarter 2, and for the full year. Capital expenditures were $100,000. I will now turn the call back to David, to discuss our outlook.

Thank you, Lisa. Please go to the slide 9. We are pleased with our results. We are monitoring trends in the broader semiconductor market. But are optimistic as we are receiving strong orders and production forecast from our customers. We are excited by our business prospects and remain committed to gaining share with new products, new customers, and a more production steps. We are maintaining our guidance for the full year for 2019. We'll continue to expect a revenue of highly million up 34% which reflects the strong demand from our existing customers. Importantly, visibility for the full-year improved due to a solid orders and a customer forecast during Q1. To conclude, our solid results show that we are executing our strategy, we are participating in the growth of our major new [indiscernible]. We are ramping production at our new factory, and we continue to deliver innovative and new products. We remain committed to achieving our vision of become a major player in a semiconductor equipment market. We look forward to continuing to deliver strong results in the balance of this year and beyond. Let's now open the call for any questions that you may have. Operator, please go ahead.

Thank you. Ladies and gentlemen, we will now begin the Q&A session.[Operator instructions]. Our first question comes from Suji DeSelva from Roth Capital.

Hello David, Lisa. Congratulations on all the progress here. So my first question is on the--Hi, David. My first question is on the inventory. You talked a bit about the dynamics there the finished goods came down but the overall inventory went up, and you're building for the second quarter. Can you just elaborate on the dynamics there and what kind of pipeline backlog visibility you have given the non finished goods inventory went up so much in the second quarter expect to be an up sequential quarter based on the strong inventory rebuild.

Second quarter, the reason that the inventory went up and then finish go strong that in quarter 1, we have a lot of substance realized in quarter 1. And for the quarter 2, we are participating in the high demand for revenue as well as the shipment. Quarter 2, we forecasted about revenue about $25 million, and the shipment will be much higher.

Okay, so shipments did rebound nicely. That's helpful, Lisa. Thank you. And then David, you cover this in detail on the prepared remarks I did want to ask it to be clear. Given the macro environment, have any of the customer forecasts or capacity plans changed versus three months ago perhaps across memory or logic. Or are you just not seeing any changes as everything moving along with the customers you have.

Actually so far with our existing customer with order delivery time, and almost no changing is this moment. As I mentioned even the last phone call and had one customer asking Delia when moms might have seen their earlier phone call. And this year, I look in Q2, Q3, we are pretty much--be the for deliver their tool and this moment we don't see much changing away now from our existing customer. So as I mentioned before, our customer is about a year expansion plan and we're looking for. It killed in their plan and probably some customer looking for their production yield and some customer just expanding their capacity to plan their scale.

Well, that's good news. And then lastly, the new product the Tahoe product. I'm curious if the customers there are the existing and the prospects are the existing customer base or whether it's new ones and if it is. Is it--are the same customers are taking SAP's capsules today and if so, is there a notion of an attach rate. David of Tahoe tools to sap stores is at one to one or is I not how to think about how Tahoe ramps.

Actually, in Tahoe, our first customary integrity invasion to Tahoe is our existing customer. So there we ship the tool and now the tool is in their customer site and for the initial testing. And obviously, we receive also other existing customer showed a high interest and the same thing and we also show there gather attention from other potential customer showed interest for the Tahoe tool. The reason for the Tahoe tool is that because of the tremendous. So if we could ask a CV in this performance and that's their fundamental demand or their core their fundamental pressure our customer GAAP. Following your concern right. As we probably read a one of the new sand ad is probably all the chemistry you see in there. Can any I call the process most of the chemistry can be neutralized. However, only sulfuric acid, you cannot neutralize mostly have to go to that dump field right putting a deep on the ground. That's really a concern for our customer and it has a tremendous pressure to deal with sulfuric acid treatment. Again, we are expecting Tahoe will be tremendous reduction to reduce the severe sulfuric acid usage. That's we think will be not just only reduce the cost more important, reduce a lot of a pressure for you moment, protection.

David, is there a notion of how many Tahoe tools would solve for every SAP stool or is that not the way I think about it.

Actually Tahoe can that is all I expect you market size roughly of 20% and most there we should about the order or $3 billion. We asked a market price aside about almost like $600 million, and most applications as opposed to [indiscernible] and also post [indiscernible]. I saw it as a big market. And at this moment, we're paying actually very high expectation for their market to take this a as product.

Our next question comes from Quinn Bolton from [indiscernible].

I wanted to follow up on the Ultra-C Tahoe, I'm wondering if you give us some updates. I think you delivered that tool in January. Do you expect it to recognize revenue in Q3, Q4 of this year. And then the second question, you talked about interest from at least three other customers for Tahoe, will you be delivering additional eval tools here in the second quarter for Tahoe.

Good question. Actually, there's a customer we as first two are shipping in a general time line and a tool right now doing their iconic initial testing right now. So I'm expecting those data will come out probably in their Q3 and timeline. And with that data be proving or gathering data come out. And there obviously , will build to a more aggressive marketing and to the other new customer. So expecting probably either end of this year or maybe the next year, we can shipping additional Tahoe tool to give a new customer, or we ship their tool to their repeating tool to the existing customer. So basically, the year 2019 revenue will not come in much of a $100 million quarter projection, but I would expect in part what can she be the next year. Revenue in the sales.

And then similar question for the new electro-plating tools. You'd mentioned shipment 2 of the advance packaging in one of the front end tool. Are those eval tools or are those tools shipped for revenue in the March quarter.

Okay. Great. Actually this the call that the [indiscernible] packaging right AP tool is repeat order. So base on our revenue recognition, repeat order to the sale, to the existing customer will be recognized revenue upon shipment. So we recognize revenue upon shipment which is issue year. Then for our MAP which is I'll show you ACP for the front end covering that can either connect the application. This tool is our first tool and to our existing customer. So this tool will go through evasion process. The typical process, the validation for the first new tool. I should say probably six months to one year or sometimes even longer than one year as a new tool. So I will call the MAP the actual plating well not probably regular revenue until the year 2020.

And then you talked about some of the current order strength you saw through the first quarter and noted a nice uptick in shipments in Q2, wondering if you could just talk by in the market. Is that demand really coming more from capacity expansions at your 3D NAND and DRAM customers. Are you seeing participation also from the foundry side of your business in that order strength.

Great. Actually the order we see of the Q1 and most of this tool organize shipment in Q2 and Q3 timeline and put this way including to all that we receive even the you wait until last month or this month. And we're pretty very busy on a Q2 Q3 time manufacture slots. And also this tool, their pretty balanced. like a web for a full customer in DRAM, 3D NAND and in a foundry. It's pretty much banners up are in a portfolio or the customer divided.

And then the last question for me just the new electro-plating tools. When you look at the gross margin of those tools, how does that compare to the Queen side of the business. Is it in line with what the corporate average or can you give us some sense how to be thinking about the margins on the electro-plating tools. Thank you.

You look in a couple of leading tool. you have an application one for the month packages which is--I got a B and they're not a margin I should say is a anyway early production. It's within there are regular margin range and with also the violence the copper plating for a company that connectors MEP and that's the put a front end application and actually in the high-end of our forecast the gross margin. So, it's a pretty waste backing to give us a good margin as to improving our deploy scale and the more customer acceptance. So anyways both the technological innovative tool.

Great. Thank you, David.

Thank you. Our next question comes from the line of Mark Miller from Benchmark.

Can you tell me where you stand on the current evaluations in terms of customers and any new customers and tools.

Well, obviously you'll see that we won't talk about the previous fall. I mean just answer Tahoe has to be mentioned and as any evaluation. And also we have a couple of plating tool is especially advanced packaging tools we repeat order by the for this coming to connect a mapping tool is our evaluation. And also there are some other small packaging tool, well as it shipping out in the Q1 timeline. And some of this tool maybe evaluation too. I mean we're keeping as our recognizing new revenue as a procedure is as a new tool and to their existing customer or other tool or mature tool to the new customer. Well I can see that as the invasion tool. So we're also expecting there's going to be evasion tool continue to be in there in Q3, Q4 timeline.

What about the new factory in terms of factory absorption of our overhead. Does that help or hurt margins. And just one curious how that factory plays and in terms your margins.

New factory, obviously, we had a much wider spacing and the more efficient area right now. Also which full clean on final assembly. So I'll give a better quality and also give us more of a convenient, high efficiency and also wider spacing for our as somebody guy to work on their tool. And has come to their margin increasing, and I should say it really depends on how much we load there is the capacity, as we loading more of our tool and also more increase their manufacturing efficiency that would increase our margin and of course the margin.

Mark McKechnie here. I might just add something on the margin front. We're not throughout the year we're still talking 40% to 45% on the gross margin. I think our product mix can have a bigger impact certainly in the near term. And of course, if you look at longer term we'd hope for our margins to drift up both from scale absorption and some better margins on some of the newer products.

[Operator instructions] Our next question comes [indiscernible].

Congratulations guys on a great start to the year. I have just two quick follow ups. David can you tell us many tools the Ultra-C Tahoe would be in a fab either by 50,000 or 100,000 wafer starts. However, the MAP is the easiest.

Let's take our example of that DRAM FAB rate and it was on 100,000 wafer from FAB. Typically, we talk about the load of the tool anywhere between 20 to 30 too. That's their number estimate.

Perfect. And can you remind us what the typical ASP for that product would be.

Obviously, even his father has a different chemistry as you say a different chemistry combination. And other than sulfuric acid add or C1, so dependent real configurations or pricing range. I think we're probably talking about their range over there about $5 million to $6 million range.

Perfect. And then lastly just a little bit more clarity on your comment about improved visibility. I know it's been asked a couple of different ways but any other further details you could give there whether it's increase visibility during the quarter from [indiscernible] or any type of clarity that you can give about your improved visibility would be appreciated.

Obviously, there's lots in the earnings call. We have some appeal has to be receiving by some of the people is due on their kind over LOI customer and verbal told us. But after the Q1 at this moment, a lot of you hasn't materialized. We as real maturity oh and also we're more clear deliver time to most has mentioned to that before Q2, Q3. So we are very busy, and obviously Q1 is going to be the quarter and Q2, Q3 even busier. And this really a busy spot thought out there and there is some still some open spot in Q4. But based on our forecast and also our tool has been shipped last year which is some of them we recognized revenue this year. So where we are fully confident about a $100 million revenue in 2019.

Fabulous. Thanks, no other questions.

[Operator instructions] No further questions at this time. I'll now hand the call back to David. Please continue.

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 our upcoming investor relations events. Gary, please.

Thanks . On David May 29, will host meetings with the Craig-Hallum Institutional Investor Conference in Minneapolis. In addition, on June 10, we will host one-on-one meeting from the people Cross Sector Insight Conference in Boston. Attendance at these conferences is for invitation only, so please contact your respective sales representative if you want to attend or schedule a one-on-one meeting. 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.