Thank you for standing by, and welcome to the ACM Research First Quarter 2023 Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions]. As a reminder today’s program is being recorded. And now I would like to introduce your host for today's program, Gary Dvorchak, Managing Director of The Blueshirt Group. Please go ahead.

Thanks, Jonathan, and good morning, everyone. Thank you for joining us on today's call to discuss first quarter 2023 results. We released results before the U.S. market opened today. The release is available on our website as well as from Newswire services. There's also a supplemental slide deck posted to the investor portion of our website that we will reference during our prepared remarks. On the call with me today are our CEO, Dr. David Wang; our CFO, Mark McKechnie, and Lisa Feng, the CFO of our operating subsidiary, ACM Shanghai. 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 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 and an unrealized gain or loss in trading securities. For our GAAP results and reconciliations between GAAP and non-GAAP amounts, you should refer to our earnings release, which is posted on the IR section of our website and look at Slide 12. With that, let me now turn the call over to David Wang, who will begin with Slide 3. David?

Thanks, Gary. Hello, everyone, and welcome to ACM Research, first quarter 2023 earnings conference call. Please turn to Slide 3. For the first quarter, revenue was $74.3 million, up 76% from same quarter last year. Shipments were $89 million, up 33% from the same quarter last year. Gross margin was 53.8%, and non-GAAP operating margin was 14.7%. Our operations in the first quarter were impacted by the several factors, including the COVID policy, the Chinese New Year holiday, supply chain challenging related to U.S. restrictions and some delayed delivery to certain customers. We expect our business to improve in the second quarter, with expected acceleration in the third and fourth quarter. Starting with product, please turn to Slide 4. We had a good growth from our cleaning tools and increased contribution from our ECP furnace and other technology with a continued strong product cycle from ECP products, which were more than one-third of our first quarter sales. Single-wafer cleaning, Tahoe and semi-critical cleaning grew 41%, driven by single-wafer cleaning tools and strong mature nodes demand in China. ACM has one of the broadest cleaning product portfolio in the industry, covering nearly 90% of all cleaning process steps. We recently introduced several important new cleaning tools, including the Bevel Etch tool and high-temperature SPM single-wafer cleaning tool, which is important for our international efforts. In Q1, we received the customer qualification of our single-wafer wet Bevel Etch tool. ECP and furnace and other technology grew 117%. Growth in this category was driven primarily by ECP product cycle with some contribution from furnace. Our higher temperature Anneal and LPCVD furnaces, including silicon nitride and poly have expanded to multiple customers and are in qualification. Advanced packaging, excluding ECP service and spare parts grow from our small base last year and represent about…

Thank you, David. Good day, everyone. Please turn to Slide 10. Unless I note otherwise, I'd refer to non-GAAP financial measures, which excludes stock-based compensation, unrealized loss on trading securities. Reconciliation of these non-GAAP measures to comparable GAAP measures is included in our earnings release. Recall that our operations last year, in the first quarter of 2022, were impacted by the Shanghai COVID restrictions. As David noted, our operations in the first quarter of 2023 were impacted by China's relaxed COVID policy, the Chinese New Year holiday, supply chain challenges related to the U.S. restrictions and some delayed deliveries to certain customers. I will now provide financial highlights for the first quarter. Revenue was $74.3 million versus $42.2 million in the first quarter of last year. Total shipments were $89 million, up 33%. Revenue for single-wafer cleaning tools and semi-critical cleaning was $36.6 million, up 41% from $26 million in the first quarter of last year. Revenue for ECP furnace and other technologies was $26.6 million, up 117% from $12.2 million in the first quarter of last year. Revenue for advanced packaging, excluding ECP services and spares was $11 million, up 183% from $3.9 million. Gross margin was 54%, up from 46.9% in the prior year period. This exceeded our normal expected range of 40% to 45%. The high gross margin was primarily due to a favorable product mix with a particularly strong mix of our higher-margin products and a lighter mix of our lower-margin products for the quarter. We expect gross margin to continue to vary from period-to-period due to a variety of factors such as sales volume, product mix and currency impacts. Operating expenses were $29.2 million versus $27.7 million in the year ago period. The increase was due primarily to higher sales and marketing and G&A costs,…

[Operator Instructions] And our first question comes from the line of Quinn Bolton from Needham & Company.

Congratulations on the nice results and continued strong outlook. I guess first, maybe David and Mark, can you just give us your sense of spending in the China market, both on sort of the mature nodes, but also including power semiconductors, silicon carbide. Are you seeing continued strength in those nodes? And how sustainable do you think that spending is?

Okay. Well, actually, looking at the real electric vehicle growth market in China in a pretty -- very promising, right? And a lot of Chinese people like driving electrical car because much less gas spending. So we see that market even grow and also they're using much more silicon base of their power devices versus silicon carbide, right? So we see that probably 12-inch wafer fab and also demanding for the IGBT or power devices is accelerating. So we see that market will be steady growth, also the multiple fab, multiple customers also aiming for this very high potential market. You also see that as also our future growth and for both cleaning tool and Tahoe plating tool and the furnace, including PECVD and the future even track. So we see that one of the major driving for the mature nodes. Obviously, 28 and 45 nano also other MEMS devices also with growth potential by the future few years.

And Mark, I know you have been putting a lot of working capital into inventory over the past couple of years. Balance is now up to almost $500 million. I guess, is there a point where you start to throttle back on inventory? I guess, I was particularly surprised by the increase in finished goods, your shipments weren't up that meaningfully, but wondering if you could just give us your kind of latest thoughts on you approach $500 million of inventory on the balance sheet, does that balance start to level out for a period of time?

Yes. Thanks, Quinn, on that. So for the quarter, Q1 shipments were down, right? And there were a number of reasons for that, that we talked about, right? The relaxation of the COVID restrictions were a lot of employees and our customers caught the illness in December and January, you had Chinese New Year, the adjustments to the U.S. restrictions as well and some delays. So that led to a lower shipment number. And so our overall inventory uptick, as you know, it's raw materials, work in process and finished goods inventory. We expect our shipments to rebound pretty nicely in Q2 and beyond. So that's one driver for the inventory. And then I think you also know that the finished goods inventory, most of that includes the evaluation tools that are at our customers. So we had an increase quarter-on-quarter from that. We also did have an increase quarter-on-quarter of finished goods inventory that was not shipped to the customer. So for those reasons. So to answer your question, we do anticipate the inventory. It's at an elevated level this quarter. We'd anticipate that being kind of a high watermark and should be coming down as we move forward.

One moment for our next question. And our next question comes from the line of Suji Desilva from ROTH Capital.

So the gross margin in the quarter was above trend. I'm curious, can you remind us what are the segments are above trend that are driving that? And I know non-single wafer clean is doubling year-over-year, is that a pace that could continue and where the gross margin implications there?

Yes. I think, Suji, this is the gross margin really depends on product combination, right? It really depends on how much portion of the high-margin product versus low-margin product. So I still think our margin is still going to be 40%, 45%. And the reason for that is we're still driving our product and for all the -- like a cleaning -- advanced single-wafer versus also the auto bench. And for the ECP, we have also front-end or back-end also too. So let's put this way. I think we're still probably -- we think our range is still 40%, 45%. And maybe until laydown our PECVD and Track become mature, especially we have spending to the international market, right? That might be changing. But for the near future, I think 40%, 45% is pretty much a good range for our product portfolio now.

And then you related the full year expectation. Do the customer delays that you saw in 1Q, did those -- are those normalizing recovering as expected right now? Do you expect any lingering impact in the 2023 numbers around COVID or U.S. geopolitical challenges in China?

Yes. There is a certain delay, right? And I think that both have some delay from the advanced nodes and also some delay of further mature nodes, too. However, I think those are delayed shipments, we think it still will be -- probably happen either something happens till end of this year, maybe something we have maybe next year. Also, I want to see that is -- we see also other new customers coming, right? So looking at for this year, we see our shipment is still record high. It's real promising. And however, those revenues will come from mostly new customers, right? So that's the reason we still maintain our revenue as we projected and will probably by second quarter later we'll have a more clear picture and then we'll start to possibly changing base on the new -- our readout for the next six months or beyond.

[Operator Instructions] And our next question comes from the line of Charlie Chan from Morgan Stanley.

So my first question is still about your first quarter revenue. I'm wondering what is kind of unsteady factor, right? As we all know there's a Chinese New Year there is COVID policy. But I'm just wondering what kind of the unexpected event? Because I feel like in terms of the full year target, your quarterly run rate should be like USD 90 million to USD 100 million. But it seems like it's not like a minor shortfall. Can you give us a more explanation on that?

Yes, let me say something, maybe Mark can add more. Actually, Charlie, first quarter always lower, right? And obviously, the Chinese New Year, and this year, more specially, there's a COVID relaxing, which impact our operation and also our supply chain, too. So if I look at the first quarter we think it's still a pretty good quarter when compared with the year ago, right? I mean, a year ago even worse, I know that. But I looking at the second quarter, obviously, will be strong, and we see the third and fourth quarter even strong and strong, right? So that's why we still say, "Hey, first quarter results, it's natural and normal. And we see more of a growth in the next 3 quarters.

Yes. Charlie, the only thing what I'd add is, if you looked at last year, maybe the first half of the year was about -- and typically, first half of the year is at 35% to 40% and in the second half of the year the remainder. So this year, the first half would be in the 35% -- that sort of similar range with the back half the rest. And we talked a few quarters ago when the restrictions on the advanced nodes first hit, and we are continuing to see a pause, right, as the overall supply chain and our customers adapt to comply with the rules. And so that's impacting the first half as well.

Okay. Yes. So that sort of cause of the shipping to that that is something that we didn't fully capture. Is that a fair interpretation?

No, I think we captured that. Yes. I mean that was -- we had talked about that towards the end of last year. And so that was anticipated. Yes.

I should say there's some delay on the shipment, right, for certain customers, which is probably also and give us minor impact from also the revenue in Q1, Q2. But those shipments maybe we think we maybe resume, right, in the Q4 or Q3 time line, but we don't know yet. It depends on the market going, right? So that's some I call not fully clear at this moment.

Okay. Okay. Yes. I mean sorry for asking all those details, because I feel like companies are running well, but share price didn't perform. So I thought this should -- because of the first quarter revenue shortfall. But that's all clear now. And the second question actually relates to the first one. So if you put a little bit a mid to long-term perspective. I mean the opportunity for China now more depends on power semi, analog, EV end market, as you just shared. So I'm wondering, just in terms of the cleaning tool in terms of percentage of CapEx, can you give us some comparison between the mature nodes versus the leading etch, right? For example, if I assume cleaning is 10% of the mature node and 5% of leading etch you said that right way to think about the opportunity?

Yes. I will see that still, we see the 28 nano and 45 something is still major mature nodes driving, right? And we will definitely see also people spending for their power devices, which are almost like 60, 80 nano devices for those power devices. So I want to say in the future like the next year, one year, two years, we see a lot of fab building to production these power devices. And so we see that's still 2 major driving 28 and 45 and also power devices. But looking at the real tool, I should say 28 nano is 80% cleaning tool, but 45% above and also including the power device, so probably 80% is the auto bench, right? It's the reverse. And our product portfolio is both cover both applications. So as you say, obviously, I see a lot of our demand for auto bench as the people moving 45 and also their power devices, right -- analog devices. So we see that the market continues to grow. Which is the -- auto bench, by the way, we'll just bring the market 2, 3 years ago. So we see that add another driving force for our revenue growth.

And my last one is about your supply chain and also Lingang facility, right? So David, you just mentioned that the long-term gross margin may have upside given the PECVD and Track contribution, but how about Lingang. I remember in your previous earnings call, you said Lingang can help you to improve the gross margin. Is that still the case?

Yes. I think there obviously, even in PECVD, there's high-margin product also kind of a low-margin product, right, including Track tool. So we're probably balance in our customer and also our product portfolio. And at this moment, I still say maintain 40%, 45% as our range. And unless until we really have a high margin and high quality product be proving in the market, which can be beyond 45%. At this moment, I want to still maintain our gross margin 40%, 45%, right? That's the right near future of gross margin.

But how about Lingang, bigger scale?

Yes. Lingang I think we're definitely -- we'll probably start production in the end of this year. And also, there's a -- add more of automation for our assembly for production. As long run, we see Lingang definitely add more value, right, and improve our gross margins. But initial one year, two years, I don't know, really. It's really -- you have the real makers fab running smoothly and they run a full scale. So as a long run, definitely improved, right. Shorter run, you add some more of a cost maybe. But I don't think not much point difference, right.

And our next question comes from the line of Christian Schwab from Craig-Hallum.

Congratulations on the continued extremely strong revenue growth outlook versus WFE. I'm wondering, number one, your thoughts, there's rumors in the marketplace that CXMT is going to do a large IPO who's historically been a customer of yours that could bring in many billions of dollars. If that does occur, should we think of that as something very positive for you over time?

Yeah, I think… [Technical Difficulty] So we see there the continued growth. And obviously, they're also one of our major customer, and we have a product cleaning and all kinds of, I call it cleaning tool, and we evaluate also in production for CXMT. Plus, also copper plating including future we will bring even furnace and even PECVD down the road. So we see the CXMT one of the major driving force for future revenue.

And then as far as the total available market that you guys talked about getting to $1 billion worth of business just in Mainland China and then the rest of the world with upside. I mean, we've got our first evaluation tool in Europe that you've talked about and a local service team that's going in. You just announced that you have a local service team in Oregon, obviously, next to Intel, very large U.S. manufacturer. At what point -- what would you have to see to start including the rest of the world, which is 10x the size of China for long-term revenue objective?

Yes. I think at this moment, I still say, we're still major sales also from China, right, is clear right now. However, we do see our differentiated product, obviously, cleaning even parts of plating in the future, we believe our furnace and also PECVD were getting to the outside China actually working with the customer in Korea actively for the multiproduct and for rest of the world, including Taiwan, U.S. and also the Europe. And this moment primarily is cleaning and we see also some people interest [Indiscernible] copper plating too. As the time moving on, and as I said, our penetrate more in the global market, and we'll see more of opportunity for people buying not only our megasonic cleaning or buy also rest of the cleaning tool and plus the copper plating tool, right? So I know the market grow outside Mainland China are still in the process in a way, but we think eventually, with our differentiated products, we should break through other major customers in the outside China. At the long run, I feel ACM targeting our half revenue come from Mainland China, half revenue come from outside Mainland China. And that's our strategic goal to grow ACM to be the major player in this world market.

And then I think it was last conference call, there seems to be Applied Materials is talking about -- everybody is seeing strength in China, right, Applied Materials, you guys, Lam, anybody who's got a presence there is seeing tremendous strength. But I think the consumption and production closing of the gap, I think you mentioned -- I think it was last quarter that in the mature node/power, et cetera, that it would probably take at least 3 years to potentially close the gap. Did I remember that correctly?

Yes. Obviously, we see that mature node [Technical Difficulty]

Operator, I think we lost David audio.

I guess I was half way. Sorry. Maybe. Can you hear me now?

Yes. Yes, we can hear you. Maybe start over, David, for Christian's question was about the gap of Chinese semiconductor production versus consumption.

Yes. Okay. I see that the obvious demand for the mature nodes, 28 to 45, is -- there's still a gap between the consumption rate versus major or fabricated in China, right? That gap will gradually reduce as more fab buildup. And more importantly, I see that also this electric vehicle driving more demand, new demand come out for the China market, right? We see that another new driving force for the 28, 45 and also the power devices. So that's probably 2 driving force, why is the new demand. Another one will reduce the gap between the production made in China versus the consumption rate.

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

Just was wondering if you could give us an impression or what you're estimating. You had the sale the -- purchase order for the SAPS tools from Europe, you're setting up support for U.S. customer in Oregon. In terms of your sales projections for this year, what percent do you think will come from outside of China?

Well, Mark, it's very hard to give you precisely, right? And we're working very closely with a major customer. We also continue to increase our investment, right, in our sales and marketing team and service team outside Mainland China. I think we're still in the market exploration, I call the stage. I think we'll have to be -- get initial product qualify then get the repeat order, they get the modem order, right? Then you get maybe other new -- I mean other products getting into. So I still see that take time. And so looking out -- I think still will be next few years majority of still come from Mainland China market, but we see the market growth, including in Korea, U.S., Taiwan and Europe. At this moment, very hard to give you percentage versus a year, right? It really depends on how we progressively or successfully our team make the sales and then service effort in outside Mainland China.

A number of semi firms have done very well supplying EV manufacturers in China. I'm just wondering, you mentioned that it's an opportunity for you. I'm just wondering, could you also kind of give me an impression of what percent of sales this year are kind of related to EV sales?

I can't give you a precise number, but I can say we see a few production line is planning in the building process or in expanding process. And for this real EV market, right, which is including power devices, analog and also the 28-nano aiming for their automotive market too. So it's a clear trend in the China fab, and they are very anxiously also they're try to getting prepared for growth for the EV market in China.

[Operator Instructions] Our next question comes from the line of Donnie Teng from Nomura.

David, congrats on the strong first quarter results. First question is regarding to your product mix in the first quarter. So cleaning tool, the percentage of cleaning tool declined quite significantly year-on-year. So which means that cleaning tool progress is pretty strong. But previously, I think your target is like the wafer clean still accounted for a very big portion of this year's sales, but the first quarter looks like it has been shrinking a lot. So are you changing your target this year? And should we expect more wafer cleaning tools sales contribution significantly improve this year? And how this will have the impact to the gross margin?

Yes. Well, actually, the first quarter, I look at our detailed product mixing, right? And like you said, our cleaning tool is lower than 70%, right, 65%. But I look at real forecast this year, we think that 65% probably is not a whole year number. I still say probably our cleaning will stay probably 70% range. And this year is still a major cleaning. The reason I say that is we see other -- our auto bench growing pretty quickly. And also, there's also demand for single-wafer cleaning tool. So I should still say probably 70% is the whole year range. But obviously, I can say furnace start growing and I call the electroplating too. But that ratio, I think probably 70% is the right portion, not the 65%.

And just a follow-up. So for the ECP and furnaces et cetera tools. Are the major customers similar to the wafer cleaning tool or they are maybe different categories?

Pretty much, I should say, obviously, copper plating is more like we are in a box, right, front end and back end. And actually copper plating we sell so far, 28-nano is major and people still buy 45, even some power devices also buy copper plating too. And so -- and for us also you can see our advanced packaging, right, all this with copper plating. So we still see copper plating still continue to grow for the coming year and for the coming next year, right? It's just a growing market. And also plus we see the -- our furnace as being expanding customer and multiple customer right now. And so we'll see that it can be another driving for us for our non-cleaning product category.

Understood. And my second question is regarding to the customers, right? So for the leading NAND maker in China, are you still seeing they are expanding their capacity or they are now more like to do some more qualification on the domestic equipment production line and the incremental capacity expansion may be need to wait until all the domestic equipment maybe like small production line qualification being passed and to continue the expansion. And for the Hynix, recently, there is an industry report mentioned about that Hynix is considering to expand Wuxi fab to increase some legacy nodes capacity. So are you seeing any signs of Hynix going to expand the capacity in China again?

We have not seen the sign, right? Obviously, you can see that DRAM market continue really suffer, right, pricing, whatever. We have not heard anything about, like you said, Hynix expanding Wuxi fab at this moment.

Okay. How -- on the NAND maker, the leading NAND maker in China?

Well, because we're -- obviously, we have some delayed shipment, right, whatever reason they couldn't do expansion. In terms of when they can restart and they're expanding, we really don't know, right? It's really -- I mean, we don't know what the plan this moment and this moment obviously, they have the real field order missing puzzle and we don't know yet when they can finish that.

Understood. So just a follow-up. So for the strong first quarter sales and as well as shipment, who are the major drivers behind the strong sales? That's my last question.

Okay. It's very hard to give you the precisely, right. Normally, we give the customer a percentage and I think yearly basis, right, Mark? We give the half year on a yearly basis.

That's once a year at the end of the year.

Once a year. Yes. It's hard to give you the quarter at this moment. And obviously, as I said, it's -- I can see this is still existing customer and also have the -- last year, we saw the new customers become mature and repeat orders, right? And some new customers, we're also facing a strong demand, but I cannot account revenue in Q1, right? That's one of the issues. We also see that. So that's a major there's still existing customers is a major contribution.

And our next question is a follow-up question from Mark Miller from Benchmark.

I'm just wondering, what was stock-based compensation. Was it around $2 million during the quarter?

Yes, Mark, it was -- it's $2.1 million for the quarter.

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to David Wang for any further remarks.

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

Thanks, Dave. So on May 31, we'll present at the 20th Annual Craig-Hallum Institutional Investor Conference in Minneapolis. Attendance at the conference is invitation-only for clients of Craig-Hallum. So please contact them to register and request one-on-one meetings with us. So this concludes the call. You may all now disconnect.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.