ACM Research, Inc. (ACMR) Q3 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by and welcome to the ACM Research Third Quarter 2019 Earnings Conference Call. [Operator Instructions] As a reminder, we are recording today’s call. If you have any objections, you may disconnect at this time. Now, I will 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 third quarter 2019 results. 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; Ms. Lisa Feng; and Mark McKechnie. Before we continue, please turn to Slide 2. Let me remind you that remarks made during this call may include predictions, estimates or other forward-looking information – 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 to these forward-looking statements. Certain of the financial results that we provide on 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, who will begin on Slide 3. David?

Thanks Gary and welcome everyone to today’s call. Our third quarter results mark another quarter of great financial results, new product development, and strategic progress. We delivered record revenue, record shipments, strong bottom line growth and we’re strengthening our balance sheet. This result validated our technology, our spending product portfolio, and our ability to scale production. We remain focused on our mission to become a major proprietor of technical equipment to the semiconductor industry. Revenue growth of $33 million, up 44%, our customers push us to deliver high volume tools in the third quarter as they scale their own production capacity, with some key delivers accelerated from the fourth quarters. Shipments were $43 million, up 33% year-over-year. This includes First Tool for new product to existing customer and also SAPS-V product to our newest and the fifth major customer, an emerging China-based DRAM producer. We expect this First Tool to translate into revenue upon acceptance in future quarters, and more importantly, drive growth as they’re moving into production. We ended the quarter with $47 million of cash, up from $27 million last quarter. We took the opportunity to build our balance sheet to better align with our corporate mission. We are pleased with our U.S. capital reach, which has put us in a strong position to support our growth plans. This cash balance does not include the stock market, private equity investments, which we have chosen to segregate and hold in reserves. Let’s move to recent customer activity and technology developments. Please turn to Slide 4. First, YMTC, we are working close to support YMTC’s 3D NAND production ramp in Wuhan. Industrial analysts predict that YMTC will ramp its monthly wafer production from 6,000 to 20,000 in 2019 and to 50,000 or more in 2020. We believe we are YMTC’s largest single-wafer wet cleaning supplier. ACM tools are being deployed in a significant number of cleaning steps and we anticipate strong demand from YMTC in the quarters ahead. Second is Huali, also known as HLMC. It is a part of the Huahong Group, a leading advanced foundry in China. Huali is in early to middle stage of a multiyear capacity expansion. They are one of our key strategic customers with a production near our shanghai headquarters. Huali is adding capacity at a leading-edge node and is completing the build out of a new fab in Wuxi. We are participating in both projects, as they scale capacity and deploy our tools in their production. We also have a number of First Tool demo systems at Huali for our newer product offerings. Next, we added our fifth front end customer and a large China base entrance to DRAM industry. In July, this new customer placed the first order for SAPS-V First Tool. We delivered the tool in Q3. This led us for compelling value proposition, yearly improvements, and a solid technology roadmap. This DRAM customer is in the early stage of their multiyear production plan and we feel well positioned to participate as they scale in 2020 and beyond. Let’s turn to Slide 5. We see great growth opportunity with our new product. Let me start with an update on our Ultra-C Tahoe. Technical trials are progressing well. Our leading customer for Tahoe has moved its First Tool into the production environment. Initial reports confirm that Tahoe delivers the same cleaning performance of competitor’s high temperature sulfuric acid single-wafer cleaner, but with much less consumption of sulfuric acid. We anticipate customer acceptance and revenue recognition from Tahoe in the coming quarters. We remain confident that Tahoe tool will become a mainstream product that will solve current and future environmental challenges faced by customers. For TEBO, we continue with our development work. This quarter, we made great technical progress to meet customer requirements for the combined removal of bigger small particles for 3D-patterned structure without damaging. As a result, our TEBO tool has been qualified for field production cleaner step with higher particle remove efficiency without damaging. We expect a good order for TEBO in 2020. Let’s now turn to Slide 6. We delivered 2 ECP AP tools during the third quarter to one of our major packaging customers. Their Ultra ECP AP is a back end assembly tool used for applying copper, tin, nickel to wafers at die level for packaging. The APs delivered more uniform metal layer in a large by incorporating our proprietary technology. This uniformly is critical and it has delivered better yield and greater cleaning efficiency. It will be deployed not only in pumping but also in fan-out, 2.5D, 3D, in the portal and other 3D advanced packaging applications. All of our products, SAPS, Tahoe, TEBO, and ECP share the same philosophy. ACM focuses around bringing new technology to solve the problems of major semiconductor manufacturers. This product and our financial results demonstrate ACM’s capability to address production challenges in more advanced nodes and complex architectures. Now, let’s turn to several strategic developments. To start, we are pleased with the reception of our [indiscernible] equity offering. We intend using the capital primarily to fund our business outside of China and for strategic M&A. Industry analysts predict China will represent over a quarter of industrial spending in 2020, making China the top spending country ahead of South Korea, Taiwan, Japan, and North America. We have increased our effort to address the non-China market with the addition of a senior sales manager in North America, Southeast Asia. We also plan to ramp our marketing efforts out of China beginning this quarter. We are also making steady progress with our Shanghai stock market listing. We are encouraged by performance of the first batch of 34 IPOs on the stock market. Even with volatility, the valuation remains quite favorable and we are still targeting a listing of ACM Shanghai shares in the second half of next year. Finally, an update on our longer term production plans. As we said on our last call, we are moving forward with plans for long-term production capacity. We are in later stage negotiation with the Shanghai Government Authorities for agreement to purchase land for new factory and R&D centers. To conclude, I remain positive on the opportunities ahead of us and our ability to participate in a build-out of next-generation fabs for years to come. We expect to win new customers around the world as industrial progress to more advanced nodes, free dimensional architecture, and 3D advanced packages. I would like to thank our customers, partners, and the shareholders for their continued support and confidence in ACM Research. I especially want to thank our employees for their hard work and dedication. I will now turn the call over to Lisa, who will discuss financial results in more detail.

Thank you, David and good day everyone. I’ll review financial highlights and then turn back to David to discuss our outlook. All figures are for the third quarter and all comparisons are against the same period last year unless I state otherwise. As a reminder, the non-GAAP financial results include stock-based compensation. For a reconciliation of non-GAAP financial results to the most direct comparable GAAP financial results, please see the last slide of the earnings release, which you can find posted in the Investor Relations section of our website. The reconciliations are also included in our exhibit to the current report on Form 8-K that we filed with the SEC. Please go to Slide 8, where we will start with the revenue. Revenue was $33.4 million, up 44%. Growth was driven by solid demand for our single-wafer cleaning equipment and our new ECP copper plating tools for advanced packaging. Total shipments were $43 million compared to $32 million in the year ago quarter and $33 million last quarter. The significant increase in shipments was driven by demand for repeat and the first two deliveries. GAAP gross margin was 48.6%. This compares to 44.4% a year ago and 45.3% in the June quarter. Non-GAAP gross margin was 49.1% compared to 44.5% a year ago. Gross margin was above our normal expectation of 40% to 45% due to our favorable product mix during the quarter. We expect gross margin to continue to vary on a quarterly basis due to product mix and the manufacturing utilization. GAAP operating expenses were $9.2 million, up 34% from the same period last year. Non-GAAP operating expenses were $7.8 million, up from $6.5 million in the same period last year and a largely flat quarter-over-quarter. Year-over-year growth in operating expense was driven primarily by R&D and the sales and marketing expenses. GAAP operating income was $7 million compared to $3.4 million in the third quarter of 2018. Operating margin was 21% compared to 14.7% in the same quarter last year and 16.1% last quarter. Non-GAAP operating income was $8.6 million versus $3.8 million a year ago. Our non-GAAP operating margin was 25.7% compared to 16.5% in the same quarter last year and 18.2% last quarter. Other income was $1.9 million, mainly due to the foreign exchange gains on our working capital from a strong dollar versus renminbi in the quarter. This gain was higher than normal due to our 4% decline of Chinese renminbi versus the dollar during the quarter. We had a net tax benefit of $0.3 million in the third quarter versus our tax expense of $0.5 million last year. The net benefit was due in part to a one-time reduction of tax valuation allowance. Also below the operating line, we have a net income attributable to the redeemable non-controlling interest of $0.3 million in the quarter. This line item was added to our account for the PE investment in our ACM Shanghai subsidiary, which represents 4.2% of the outstanding shares of ACM Shanghai. GAAP net income attributable to ACM Research was $8.8 million compared to $3.9 million last year and $4.3 million last quarter. Non-GAAP net income was $10.3 million compared to $4.3 million last year and $4.9 million last quarter. Stock-based compensation was approximately $1.6 million, elevated during the quarter preliminarily due to the employee stock purchase related to China IPO. GAAP net income attributable to ACM Research per diluted share was $0.45 compared to $0.21 in the year ago period. Non-GAAP net income per diluted share was $0.53 compared to $0.23 in the year ago period. The tax allowance reduction and the positive impact to operating from currency fluctuation resulted in a $0.14 improvement to our GAAP and non-GAAP net income per diluted shares. Now, I will review the balance sheet. We ended quarter three with $47.3 million in cash and the equivalent, up from $27.6 million last quarter. We completed our U.S. equity raise in August, which added approximately $23 million in net primary proceeds to the ACM. This was partially offset by our $4.2 million investment in a venture capital fund. The cash figure does not include $27 million in proceed from the private equity raise related to the stock market, which we have voluntarily segregated as restricted cash. We ended the quarter with $15.7 million in short-term borrowings, up slightly from $15.1 million last quarter. We ended the quarter with $43.5 million of inventory. Finished goods were $18.6 million, up from $13 million last quarter. Cash flow from operations was breakeven for the quarter. Capital expenditures were $0.5 million. I now turn the call back to David to discuss our outlook.

Thank you, Lisa. Please go to Slide 9. For 2019, we continue to expect our revenue to be approximately $105 million. This represents more than 40% annual growth. We are proud of this growth, given a challenging year for the industry. As we look to 2020, we plan for growth. We plan to provide formal guidance for the full year 2020 on our next earnings call. To conclude, we are executing our strategy. We are participating in the growth of major new IC fabs. We are ramping production and we continue to develop and deliver innovative new products. We are confident in our opportunity in China, expansion outside of China. We remain committed to achieve our mission to become a major player in the semiconductor equipment market. Let’s now open the call for any questions that you may have. Operator, please go ahead

[Operator Instructions] Your first question comes from the line of Quinn Bolton of Needham and Company. Please go ahead.

Hi, David, Lisa and Mark. Congratulations on the really strong results here in the third quarter. I guess David, my first question for you. I understand the upside in Q3 was partly due to some accelerations or pull-ins from Q4 into Q3. But I am just kind of curious, as you look into the fourth quarter and you maintain your annual revenue target of $105 million, it implies revenues in the December quarter down to about $22 million. I think you pulled in tools to the third quarter. I guess I would have thought that that might have freed up some manufacturing slots that you could fill in with other customers. And so that fourth quarter drop seems pretty extreme. Can you talk about the ability to try and fill in those manufacturing slots that might deliver some upside to that $105 million target or the $22 million implied by our annual guidance? And then I’ve got a couple of follow-on questions.

Great. Thank you for the question. Q3, actually we are shipping almost $43 million, right, total shipment. It’s a very record high. We are really excited for the power of the manufacturing capability and definitely, that is good record for us to be able to build such quantity. In Q4, and the shipments that you mentioned were predicted $105 million of revenue. So we’re definitely consider put a slot, a variable building there further even Q1 deliver. It’s a very good time for us to make more of quality control and also we’ll start building tool put some slot into the preparation building as we’re receiving order and delivery to Q1. Any other adding remark, Mark and Lisa?

I think that’s a good answer. I wouldn’t add anything else. Quinn, you said you had some follow-on questions?

I guess looking into the Tahoe and TEBO evals that are going on, it sounds like you’re making progress on both fronts. Can you give us some sense today how many Tahoe and TEBO tools do you have in the field that represent opportunity for rev rec? And then it sounds like for both tools, you think you’re in a position to start taking production orders in 2020. How much could Tahoe and TEBO contribute to next year’s – I know you haven’t given a formal revenue guide, but how meaningful could that rev rec and follow-on production orders be for Tahoe and TEBO next year?

Okay, great. Quinn, actually Tahoe, we have tool delivered in January this year. So the customer start to evaluation the tool. At this stage, they’re still in the middle stage. However, they do have initial data come out and some of the other more device yield data coming soon. So we see that customers like the result and they like our technology, and also especially like we’re saving more than 80% of sulfuric acid, right. So with that satisfaction with the customer, we definitely anticipate the same customer will buy repeat order next year. And then, with that validate for the Tahoe tool and we’ll consider multiple actually order come from other additional new customer. So now, we’re approaching customer in China, customer in Taiwan, customer in the U.S. and also customer in Korea. The reason for that is because we believe Tahoe Tool is a significant environmental impact concern by made this single-wafer sulfuric acid, right. You can look at the people getting to the single-wafer sulfuric acid cleaner, the huge amount of the sulfuric acid has been consumption. More importantly is for – with treatment, those acids very difficult and for some country, you can put in landfill. But some other country cannot do that. You have redo with treatment and consumption of a lot of energy, a lot of cost. And so with that in mind I think that will be the real revolution tool and for the custom adapter to really solving their big headache for the acid consumption or acid with treatment. So regarding the TEBO tool and as mentioned in our new series tool, we do meet progress and for TEBO, and something I cannot disclose so far right now, because it was still in the patent application process. We shall see that TEBO made tremendous progress. And as TEBO going well with first customer and also anticipate the repeat order from this existing customer. And with this one custom evaluated TEBO tool, I can see definitely more customer interest there, right. So that we see both Tahoe and TEBO will enter new shipments and also definitely revenue for next year. So we’re expecting those kind of activity will add – boost our revenue for next year. Mark, anything?

Yes, I might add a few to that, Quinn. I appreciate that. So on the – you asked a little bit about the demo tools that are out there with customers. And so we broke out the finished goods inventory at a little over $18 million. And that’s carried at cost. If you took a reasonable gross margin on that, it would work out to about $36 million of revenue. And it’s a range of tools. As David said, some are additional tools to our existing customer base. Some are actually into new customers. But if you look out to 2020, SAPS will be the big driver. Of course, it’s the main business now. But we see good incremental business from Tahoe, TEBO, and the ECP products. So we’ll give you the full guidance on the next quarter’s call.

Perfect. Thank you, guys.

Quinn, I want to add one thing here. We do have one ECP for front end plating tool was shipped June this year. Right, those tools will be qualified probably middle of next year or early next year and then we’re expecting also revenue contribution or repeat order from existing customer and also probably for other new customer for the new shipment.

Right. Thanks, Quinn. Maybe next question operator.

Thank you. Yes, our next question is from Patrick Ho of Stifel. Please go ahead.

Thank you very much and congrats on the very nice quarter. Maybe as a follow-up question to Quinn’s regarding the market environment. You saw some strong shipments and revenues from the existing customer base this quarter. Qualitatively as we look at 2020, how are you looking at contributions from both TEBO and Tahoe as well as the ECP tool as contributors to another growth year? Is it just going to be a small incremental amount or do you see it as a big contributor to the growth in 2020?

Okay, Patrick. Good question. Obviously, as I said, we have TEBO. Tahoe has been qualified by a customer. This is the first customer and as I mentioned, we’re going to expect a repeat order from the existing customer with the qualified tool. Those tool I’m pretty sure will be regular revenue for next year. And but for any new tool, which his from new customer, I mean for the Tahoe, TEBO, ECP, that will be eventually we’re past deliver and recognize the revenue upon acceptance. So this new customer next year, whether it’s MPO, most likely will be coming as a shipment. Now, we recognize revenue as we expect that fast. So come to the point is definitely, as I said, two product ECP will add the revenue. However, we’ve added more new customer. So maybe the most bigger revenue come to the year 2021, but we still say next year a quarter shipment, contribute like a shipment. Mark, anything you want to add?

The only thing I’d add is, I mean, we talked a little bit about some of the industry analysts that are predicting kind of capacity adds at some of our bigger customers. And so we’re busy. We think we’re going to be pretty busy on our production schedules next year with our second factory. And David also pointed out that, in his prepared remarks, that we’re looking at some land for longer-term production adds for longer-term capacity. So we feel pretty good about growth from our – mainly from our current products alone. But we see a pretty good contribution from Tahoe, TEBO next year.

And maybe either for Lisa or Mark in terms of my follow-up question, which is related to those new products. Obviously, new products and acceptance from initial customers tend to have lower margins. You guys did a great job this quarter due to product mix. What are some of the efforts you can take to kind of soften some of those initial cost pressures that you typically see with new products or new customer acceptance?

You want to start?

I can start that. Obviously, for the first tool, right, especially new tool and there are certain – we give the same here for the people to adapt a new product, new application. And we call it the First Tool discount, right. As time – as the tool qualification is going on and we’ll give the regular pricing to reflect the value of the tool we give the customer. So again, yes, we have certain pricing at the beginning. However, as the customer qualifies the tool and they like the tool, and also put more function and more mature, I call the additional mature design. And those tools get more revenue, more pricing on the market.

I’d just add, Patrick, we’re confident in our – we talked about 40% to 45% kind of our gross margin model. If I look at the cost and the revenue associated with the demo tools that we have out there, I’m pretty comfortable with the gross margin of what’s out there in the field. And we think as we ramp up these new products next year, the contribution will be well within our gross margin model. And longer-term, the new products should carry a better margin. Thank you

Great. Thanks a lot guys.

Thank you. Next question is from Sujeeva Desilva of ROTH Capital. Please go ahead.

So a couple things. On TEBO, it seems like it’s coming into the revenue line. Can you remind us which nodes or applications TEBO is more suited for versus SAPS, if there is a differentiation there?

Okay. So basically, SAPS, we try to clean a flat wafer. Most flat wafer is a major application and TEBO is more cleaner for the pads and wafer or with a trench structure or mirror inside. So as I said, the customer with us, right now, they’re qualified actually 28 nano or large product. And but I should say that the technology we have for TEBO definitely can be expandable to the smaller geometry. So as we go into the different customer and we see this technology, we’ll get into some more geometry and further application.

And David, are there TEBO applications for memory as well? Are there certain memory technologies where TEBO comes in?

There is a lot of also pattern structure in the memory site. They have a lot of structure in the gated site and also probably also in the capacity side too. So we do see that potential for using the TEBO application.

Okay, great. And then on the manufacturing side, how many lines are you now running at fab 2 and what’s the utilization? How close are you to needing that new land and facility built demand wise?

Our manufacturing second factory, it’s pretty busy right now. This moment, I should say – and our line spot you can holding 10 to 11 machine simultaneously. So that’s the capacity we’re doing right now. This moment, we are definitely manufacture a bunch of different toolsets and also we have our new product and we manufacture there and also some other product, which we are developing right now. We will manufacture there too. So it’s very busy right now.

And then my last question is you mentioned a fifth customer, DRAM customer, can you update us on the status there, perhaps timing of shipments to that customer or if you are already started shipping machines there – tools there for acceptance?

The fifth customer we are adding now, right. We did ship a machine in Q3 timeline. The machine is in assembly or in the final – I mean in the qualification right now. So this is a faster machine and with our record data for yield improve, and also providing much better cleaning performance. And we’re expecting this tool will do a lot of enhancement for the new customers here at the site and also particular cleaning removal performance and enhancement.

Okay, thanks. Congratulations on the strong quarter everybody.

Thank you, Sujeeva.

Thank you. Our next question is from the line of Christian Schwab of Craig-Hallum Capital. Please go ahead.

Hey, Chris.

Hi, David. Great. Thanks for taking my question. Great quarter and another great year. I was just – had one follow-up question kind of along the lines of what Patrick was asking. As you guys sit here today, I know we are not giving guidance for 2020, but can you give us your expectations, whether it’s new customers and new tools or continued strong spending, in particular in China on current products, that gives you confidence in growth in 2020 today?

Let me put it this way. We see our existing customer in China they are still keeping their building plan. And you probably know that YMTC continue expansion. They are probably 50 K next year. And then also, we see the fifth DRAM customer, they’re also expansion. And then you look at Huali. They have a continual – they’re building up their 2 FAB, one in Wuxi, one in Shanghai. And as I see SMIC, they’re also starting building a fab right now. So we see the activity both happen in the fab in shanghai and also in Beijing. Then as part of the high end site, as we see their market recover, we hear something going on, not firm yet. But we do believe there’s something going on next year for sure. So we are very – for existing customer, we see a very positive sign 70 pattern this year. And then also with our new add-in product, like we mentioned with Tahoe and TEBO, and also our ECP, both in front end, also back end at advanced packaging side application. So we do have new product that we’re adding to our revenue stream. So we’re expecting another growth year next year with not just our existing product, with also new product. So we’re very happy and very excited about next year. And we’ll be very glad to announce the final number in the next earnings call. And that’s probably in the March timeline.

Christian, just like to add and put kind of a different high level on there. We felt pretty good, obviously, about 40% growth in a challenging year for the industry. We had pretty strong – you guys all know the DRAM player in the first half of the year who was really strong for us. And we didn’t have much if anything in the second half here. And so we’ve got – a number of our big customers are still in their early middle stages. We don’t really need a big recovery in the DRAM spending to drive good growth, if you look at our new products and where our early middle stage customers are.

Fabulous. Thank you for that clarity.

Your next question is from Mark Miller of Benchmark. Please go ahead.

Let me add my congratulations on the quarter hi. You didn’t provide a cash flow statement, at least in the information I received. I was just curious with the strong results you were cash flow from operations breakeven. Just was wondering what was going on with that?

Yes, thanks, Mark. And we can give you a little detail. You’ll see more coming out in the 10-Q but look, I think as we talked about on the call, we had some acceleration into Q3. And so we delivered a lot of product in the quarter. And so we came our right about cash flow neutral from operations. Looking out into Q4, a lot of the products we delivered in Q3, we expected collections and cash flow positive in Q4.

Just was wondering based on your existing backlog and we talked a little about margins prior in this call. Does that represent – are those tools and backlog consistent with the margins that you have been recently reporting? You did say we are going to see higher margins on new products. I’m just wondering about the margin profile and the backlog?

Yes, you are asking about the tools – the finished goods inventory. Now, we’re comfortable with the margin profile of those. We have POs that have specific prices tied to those. So we know what the price is for those. And we’re comfortable with the margin profile of those.

Thank you.

[Operator Instructions]

I think we are good operator. Maybe we’ll wrap it up. Go ahead, David, if you want to wrap it up.

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. Next Tuesday, November 12, we’ll be attending the 10th Annual Craig-Hallum Alpha Select Conference in New York City. On the next day, the 13, we will be at the Roth Capital New Industrials and Technology Day, which is also in New York City. Finally, on December 4, we’ll be hosting meetings at the Benchmark Discovery One-on-One Conference in New York. Attendance at all of those conferences is by invitation only. So please contact your respective sales representatives if you want to attend or you want to schedule one-on-one meetings with us. Thank you all again. This concludes the call and you may now disconnect.

Thank you, ladies and gentlemen. This concludes the conference call for today and thank you for participating. You now may disconnect.