ACM Research Inc

NASDAQ:ACMR

Earnings Call Transcript 2024-Q3

[Operator]

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the ACM Research Fiscal Third Quarter 2024 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'll turn the call over to Mr. Gary Dvorchak, Managing Director of the Blueshirt Group. Gary, please go ahead.

[Gary Thomas Dvorchak]

Good day, everyone. Thank you for joining us to discuss third quarter 2024 results, which we released 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 Investors section of our website that we'll 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 opinion 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 and an unrealized gain loss on short-term investments. 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 on Slide 13 and refer to Slide 13. Let me now turn the call over to David Wang, who will begin with Slide 3. David?

[David Wang, executive]

Thanks, Gary. Hello, everyone, and welcome to ACM Research Third Quarter 2024 Earnings Conference Call. Please turn to Slide 3. For the third quarter, revenue was $204 million, up 21%. Shipments were $261 million, up 23%. Profitability was good with a gross margin of 51.6% and operating margin of 27.5%. We ended the quarter with approximately $369 million of cash and time deposit with a positive cash flow from operations for the quarter. Revenue for the first 9 months of the year was $558.6 million, up 44%. Year-to-date shipments were $709.7 million, up 56%. We believe this growth is a significant demonstrate market share gain for ACM and the contribution from new product cycle. Now I will provide detail on product. Please turn to Slide 4. Revenue from single-wafer cleaning, Tahoe and semi-critical cleaning product grew 22% in Q3 and represented 79% of total revenue. ACM offers comprehensive top to bottom cleaning portfolio. We estimate the global total available market or TAM for the cleaning is close to $6 billion and ACM products supporting more than 90% of all cleaning process steps in both memory and logic manufacturing. Our factor infer proxy mixing or STM have led to increased confidence toward our target for continued market share gain in cleaning. As a reminder, we estimate SPM process represent about 25% of total front-end cleaning market, but so far, it has been a small contributor to our business. During prior report, we announced a technical progress in our high-temperature STM solution. Recall that only one other major cleaning tool supplier service the high-temperature market for STM. During our first quarter call, I reported a technical breakthrough that could enable us to be the second player. We are now in late-stage evaluation at a number of key customers, and we are committed to become the second supplier in the world supporting commercial high-temperature STM cleaning. That's not all. Today, we issued a press release, marking a major performance breakthrough for Tahoe, ACM's environment solution for the middle and low-temperature STM segment. The Ultra C Tahoe now achieved the performance of a stand-alone single wafer cleaning tool on low to high temperature STM process. The Tahoe platform advanced cleaning capability have achieved average particle accounts of less than 6 particle at 26 nano size, meeting the stringent requirement for the advanced node manufacturing. The tool is also capable of removing YX nanoparticle for the most advanced logic memory applications with additional of smaller particle filtering system. Tahoe's patented hybrid architecture is among the first in the industry to combine batch wafer process and single wafer cleaning chamber into the same STM tool. The hybrid architecture delivered enhanced cleaning performance, high throughput and process flexibility with up to 75% reduction in chemical consumption. ACM estimates cost saving of up to $500,000 per year from sulfuric acid alone with additional environment and cost benefit from reduced sulfuric acid and treatment and disposal. With the rise of AI to the forefront of the consumer mind, we expect increased public attention on the environmental impact of semiconductor chip manufacturing. We believe ACM Ultra C Tahoe is well positioned to help customers increase production of advanced AI chips, but with a reduced footprint on the environment. Put another way, Tahoe is good for customers and good for planet. We believe the Ultra C Tahoe is another example of excellency from ACM innovation and world-class R&D team and demonstrate how innovation can achieve the information economy and protect environment. We also announced today that the upgrade Ultra C Tahoe is now in mass production at several high-volume customer facility in China and under evaluation at additional logic and memory customers. We expect to deliver more units by end of the year. The market opportunity for Tahoe is quite large as the middle and low temperature is more than 80% of the STM market and thus about 20% of the overall cleaning total tools market. We believe ACM's cleaning portfolio, including SAPS, Stiffel, Tahoe, semi-critical together with STM and supercritical CO2 dry put ACM in world-class status. We see good opportunity for continued market share gain in Mainland China, and we are confident we have what it takes to scale major customer in international markets. Revenue from ECP furnace and other technology grew 36% in Q3 and represented 17% of total revenue. Momentum for our plating tool remains solid for both front-end and back-end tools. I'm pleased with the revenue performance. I also noted that shipment for the ECP furnace category grew by 67% year-to-date. Our furnace product cycle is also gaining traction with other memory and logic customers. Overall, we now anticipate having 17 furnace customers by the end of this year, up from 9 at the end of last year. We expect the contribution to revenue from furnace to accelerate in 2025. Revenue from advanced packaging, which exclude ECP, but includes service and spare declined by 21% for Q3 and was up 3% year-to-date and represented 4% of revenue. This category, including a range of packaging tools, including coater, developer, scrubber, PR sweeper and wet etchers and also service and spare parts. And we are exploring new products and technology to participate in the next generation of advanced packaging. We believe ACM is one of the only company that offers a full set of wet tool, cover plating tool and polish tool for advanced packaging. Year-to-date, growth of advanced packaging was low. We attribute this to slower growth for China-based packaging firms who are more exposed to broader end market trend. We also know this category does not include our ECP tool for advanced packaging. In early September, we announced purchasing orders for 4 wafer level packaging tool from U.S. customer and U.S. R&D center. These tools are scheduled for delivery in the first half of 2025. We are very optimistic about our fan-out panel level packaging tools. We have recently announced 3 panel-level packaging tools, including vacuum flux clean tool for chiplet, the horizontal plating tool and the bevel etch tool. This 3 new panel tool makes a strong offer by ACM to address advanced panel level packaging market. We have been developing this technology for years and believe the market is now coming to us. Our technology are applicable to micro order pitch, high-temperature, high density packaging. This is especially relevant to AI packaging of GPU at high-density, high bandwidth memory, HBM. We see a large global opportunity as several major leaders have choosing panel for their AI chip packaging solution. Finish up on the product. We are making good progress with our Track and PECVD platforms. Both of these products have innovation, a differentiated platform design and allow for process flexibility and high throughput. We have a solid list of ongoing demonstration and evaluation for both Track and PECVD. We expect further progress for both PECVD and Track over the next year with revenue likely in late 2025 and more no contribution in 2026 and beyond. Moving on to the customer. Please turn to Slide 7. In Q3, we saw broader demand for foundry, logic, power, and memory. We had fall 10% customer for the period, represent 63% of the revenue. In China, we have a leading position in cleaning and target additional market share gains. We believe we have become a world-class multiproduct company with a competitive product in the market for plating furnace, and we have a solid evaluation pipeline for Track and PECVD. In the U.S., we continue to make steady progress. I already mentioned the order for 4 WLP tools scheduled for delivery in 2025. In addition, activity with our major U.S. customer continues to progress. Both of our SAPS tools have already achieved supplier qualification, and we have moved to the production qualification process. And the backside of the TEBO etch tool and with remainder of this year is in the later stage of supply qualification. In Europe, we are also in the later stage of qualification of Ultra C SAPS-V cleaning tool, which we delivered to a major global semiconductor manufacturer in Q3 of 2023. In Korea, we remain engaged with the customer for a range of tools. To support growth, we made progress on our facility expansion in China and other regions. Please turn to Slide 8. In China, on October 20, our subsidiary, ACM Shanghai, hosted an opening ceremony for the Lingang production and R&D center that are gathering employees, customers, supplier, and local officials. The first of 2 modern manufacturing floor, including state-of-the-art of automation system and has been initial operation. During the third quarter, we also moved into the new ACM Shanghai headquarters. The facility is also in the Shanghai High-tech Zhanjiang Science Park and offer a great working environment for our engineering team. In the U.S., on October 1, we completed the purchasing of our new Oregon facility, which including 5,200 square feet cleaning room. We plan to move in early next year. We plan to deliver several tools in 2025 to provide easier access to major customers for advanced tools evaluation. ACM is building a strong footprint in the U.S., including our own clean room R&D lab and the growing service team. We see this a great opportunity to participate in the market growth of U.S. semiconductor. I will now provide our outlook. Please turn to Slide 10. We have raised our 2024 revenue outlook to be in the range of $725 million to $745 million versus prior range of $695 million to $735 million. At the middle point, our revised outlook represents a 32% year-over-year growth compared to 28% previously. Shipment activity remains strong, and we continue to expect the full year shipment growth rate to outpace the revenue growth rate. Our visibility for the remainder of the year is largely driven by our current order book and the qualification and customer acceptance of previously shipped evaluation tools to a range of customers. From our perspective, we believe WFE spending in Mainland China will remain at a high level as the country continues on its goal to match the production capacity with end market consumption. We continue to focus on market share gain, new product and increased localization to drive our growth objective in China market. Further, we are expanding our business to new customers in the U.S., Korea, Taiwan, Europe and other Asian markets. Our long-term target is to generate half of our revenue from outside of China. Now let me turn the call over to our CFO, Mark, who will review details of our third quarter results. Mark?

[Mark McKechnie, executive]

Thank you, David. Good day, everyone. Please turn to Slide 11. Unless I note otherwise, I'll refer to non-GAAP financial measures, which exclude stock-based compensation and unrealized gain/loss on short-term investments. Reconciliation of these non-GAAP measures to comparable GAAP measures is included in our earnings release. Also, unless otherwise noted, the following figures refer to the third quarter of 2024 comparisons are with the third quarter of 2023. I'll now provide financial highlights. Revenue was $204 million, up 21% Revenue for single-wafer cleaning, Tahoe and semi-critical cleaning was $161 million, up 21.6%. Revenue for ECP, front-end packaging, furnace and other technologies was $34.6 million, up 35.6%. Revenue for advanced packaging, excluding ECP, services and spares was $8.4 million for the third quarter, down 21% but for the first 9 months of the year, it grew by 2.9%. Total shipments for the quarter were $261 million, up 23%. Gross margin was 51.6% versus 52.9%. This exceeded our long-term gross margin target of 40% to 45%. For the full year, we expect our gross margins above the high end of the range. This is due to year-to-date gross margins of about 50% and our expectation for gross margin in the upper end of our 40% to 45% target range for Q4. We continue to expect gross margin to vary from period to period due to a variety of factors such as sales volume, product mix and currency impacts. Operating expenses were $49.2 million, up from $45.3 million, R&D was $24.5 million versus $22.7 million, Sales and marketing was $13.2 million versus $14.3 million, and G&A was $11.6 million versus $8.4 million. For 2024, the full year, we plan for R&D in the 12% to 13% range, sales and marketing in the 7% to 8% range, and G&A in the 5% to 6% range. Operating income was $56.1 million versus $43.8 million. Operating margin was 27.5% versus 26.0%. Realized gain from the sale of short-term investments was $0.2 million versus $0.7 million. Recall that unrealized gain is not included in non-GAAP earnings. Income tax expense was $4 million versus $0.7 million. For the full year, we now plan for an effective tax rate on non-GAAP pretax income in the 12% to 14% range. Net income attributable to ACM Research was $42.4 million versus $37.6 million. Net income per diluted share was $0.63 versus $0.57. Our non-GAAP net income excluded $11.9 million or $0.18 per share in stock-based compensation expense. Stock-based compensation expense declined sequentially in Q3 and due to the accelerated amortization for the ACM Shanghai stock option grants, we expect SBC to decline again in the fourth quarter. I will now review selected balance sheet and cash flow items. Cash, cash equivalents, restricted cash, and time deposits ended the third quarter at $369.1 million versus $366.8 million at the end of last quarter. Inventory net was $628.7 million versus $602.9 million at the end of last quarter. This included raw materials and work in process of $329.8 million and finished goods inventory of $298.9 million. Finished goods inventory mainly includes first tools under evaluations at our customers. It also includes finished goods at ACM's facilities. Cash flow from operations was $11.9 million for the third quarter and $63.9 million for the first 9 months of the year. Capital expenditures were $33.4 million for the third quarter, $73 million for the first 9 months of the year. For the full year 2024, we expect to spend about $100 million in capital expenditures. That concludes our prepared remarks. Let's open the call for any questions that you may have. Operator, please go ahead.

[Operator]

[Operator Instructions] Our first question comes from the line of Charles Shi of Needham & Company.

[Yu Shi, analyst]

Maybe the first question, I think I heard you talking about the wet clean product portfolio you have right now covers 90% of the overall worldwide wet clean market, which includes all kinds of devices. But I want to ask specifically on 3D NAND, what's that coverage percentage number look like? Are you able to cover 100% of all the 3D NAND applications?

[David Wang, executive]

Charles, very good question. Well, actually, as I said, our typical process cleaning, we cover almost 90% and this moment, I want to say the only single wafer phosphoric asset we have not put in the market yet. So basically, rest of the tool and we are either in R&D with the customer also we're putting the production. And even including all this phosphoric etching for the Via and the 3D NAND and also high temperature of the STM process, right, and most of other TEBO process. So we're pretty fully engaged regarding this 3D NAND wet process, I call cleaning.

[Yu Shi, analyst]

So basically, there is still some gaps, but you're engaged this comment would apply to 3D NAND as well?

[David Wang, executive]

Yes. I should say probably by end of this year, we should be qualifying all the process and including we already put in production existing process. So we have made a lot of progress.

[Yu Shi, analyst]

The second question I have, I think you said that China WFE, you think it will remain at a high level next year. There's a 2-part question. So number one, in terms of the change from this year's level, you remain at this year's already at a pretty high level, but I want to understand when you say remain at a high level, you're expecting flat to up? Or what's the expected range here? That's one part. But the other part, the question, obviously, with the U.S. election that happened a couple of days ago there, obviously, it's pretty uncertain at this point where the trade policy of the new U.S. administration can go. But does that comment include any of the potential impact of any of the new tightening or you are assuming all the international export control rules to remain the same as of today?

[David Wang, executive]

Let's come to the first question. I should say last 4 years, you can see the China WFE market growing quite steadily. And I would say probably the next few years, we still have the strong demand in China market. While there's still a lot of memory and also logic foundry IGBT market, there is still the building process for the fab. So we will come to the next year, and it's hard to really give you number. We think (indiscernible) and may be a little bit low, might be a little bit up, really hard to really predict at this moment. But I want to say that strong still in the next few years, the building process to keep going. You're looking at all other foundry business, they have up time, their utilization of the line is pretty heavy. So I want to say we're still very positive about growing in the China market. Any question for the first one before I answer your second question?

[Yu Shi, analyst]

Yes, please. Please continue.

[David Wang, executive]

This is only 1 day. It's hard to predict. We have to follow the rule of all the countries, all the regulation come out new or changing. And basically, we're going to really support all production ramping of a key customer in the global.

[Operator]

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

[Mark Miller, analyst]

I'm just wondering, you've been consistently posting gross margins above your target range for this year. It sounds like they were expecting the margins to come back down to the high end of the range in December quarter. Looking at your backlog, are we going to go back to your target range in 2025 for gross margins?

[Mark McKechnie, executive]

And I think you did, yes, Q3, another good quarter year-to-date, just above 50%. It really has to do with our product mix and we have a lot of differentiation, and we've done well on that front. Foreign exchange has helped. But longer term, and we're not going to give guidance, obviously, for next year. But in general, longer term, our target remains 40% to 45%. And that can change given a broad product line. Our backlog, the margins for that without giving too much, they're pretty good. They're pretty healthy. And so we'll leave it at that, Mark. I think we're sticking to our 40% to 45% target.

[Mark Miller, analyst]

You announced the orders from a U.S. customer for delivery in the first half of next year. Any thoughts on where we can expect in terms of your sales outside of China? Is that going to be significantly increasing next year?

[Mark McKechnie, executive]

Yes. I think our business outside of China, obviously, it's a corporate focus. We believe that we really scaled up our business in Mainland China. The model is scale it up near some of the larger customers, these activities that have been going on, and this is where the spending has been and then expand that into the global markets. And we're planning for good growth in China alone next year. International really depends on our customers and the evaluation status. It's see where they are with their projects and what have you. We've got a few demos in later stage and a lot of focus from the company. I think this clean room in Oregon is a good commitment. So I think when we give our 2025 outlook range, when we give that early next year, we'll probably include some. But right now, we don't want to say exactly how much mix, but we'd expect some contribution next year from the non-China markets. Anything to add, David?

[David Wang, executive]

Yes. Well, actually, we do see some customers obviously interest into our cleaning and also copper plating tool. And we see that a big potential, especially our SAPS mechatronic and also this Tahoe tool which can saving sulfuric acid up to 75%. So we see a lot of opportunity for our differential product and getting into the global market. So we're expecting those different product will be in the state of accelerating, getting to their customer outside China.

[Mark McKechnie, executive]

I would add, Mark, the activity is good. I know we're all looking for orders, but we've got a pretty good-sized team in U.S., Europe, other areas, and so we're pretty heavily engaged with a number of other customers that we haven't spoken about here.

[Operator]

[Operator Instructions] Our next question comes from the line of Suji Desilva of ROTH Capital.

[Sujeeva De Silva, analyst]

Maybe following up on Mark's question there. The global customers that you expect to contribute in 2025, what geography do you think is the near-term opportunity across Europe, U.S., Korea, and Taiwan?

[David Wang, executive]

Yes. It's hard to give you that precisely right now. And obviously, we see the opportunity in the U.S. as we have advanced packaging tool we got this year, we're shipping first half of next year. We'll continue to see that opportunity. And we already have 3 tool in one of the key logic customer, their evaluation of the product on a different process step. And also, we see other interest partly and actually in Asia. So we're engaged with those customers. And next year, we see that CapEx continue going on with their projection or their plan. So we're really excited in engaging with those big guys and also outside China really try to penetrate our differential product in the production line. As I said, a lot of our tool we will offer to the market and get the yield improve and also get a big asset saving at the same time, providing excellent particle removing performance. So we'll see that, as I said, our different product (indiscernible) for the market.

[Sujeeva De Silva, analyst]

And then on the high-temperature SPM solutions, it sounds like you have technical advantage there. What are the specific specs that you can come in to compete with the incumbent there? Is it throughput or more efficient? Any color there would be helpful.

[David Wang, executive]

Yes. Well, actually, let me put this way. Our SPM product have 2. One is the high-temperature SPM single-wafer tool, which handle 170-degree higher sulfuric acid. And then this tool actually, we did a breakthrough, as I mentioned before. We can much control our chemical splash outside chamber. So therefore, we have a better cleaning environment and with our cleaning chamber, we don't need much time spending on the cleaning the chamber itself. So that will give you uptime better, and also give a good particle performance. The second one is real Tahoe tool. They're actually targeting lower and middle level temperature of SPM. And this has been our flagship tool and their combined batch and single. And the real perform breakthrough this year is we have excellent particle remove efficiency. As I said, 26 nano particle adding about 6 particle only. So that's definitely equivalent to the single wafer process capability. So with continued, I'd say, improving the filtering system, and this tool can be further used into the removing 1x nano particle, which is really demand, right, for all the advanced nodes, memory and DRAM, and also logic. So we see that both tools and work in the market in China, also outside China. As everybody in sulfuric acid process, they're actually very headache about their with treatment, also handle this material in the fab environment. So that's really we're giving a good performance and also environment, I call it protection saving for the other fab in the world. So we see that the bigger opportunity for our tool.

[Operator]

Our next question comes from the line of Edison Lee of Jefferies.

[Yu Lee, analyst]

I just have a quick question because you did mention that the advanced packaging market in China is slowing down. And I think maybe you can actually help us understand whether that should be a leading indicator for front-end spending in China, whether we should be worried about front-end spending in China as a result of the slowdown in advanced packaging in China. So how should we think about that?

[David Wang, executive]

Yes. Well, I want to say that is really looking at last year and also in the first half of this year, it's slow. However, we see that a gradual pickup in Q3, Q4. And we do have other orders coming so you look at other market in the foundry business, they pick up. I think from now on, the gradual pick up on this advanced packaging WFE spending. So we are positive, I should say, Q4 and next year. But I'm talking about past. Our revenue is really represented the last 4 months and last year, all the tool over shipping. So that's our view about this advanced packaging status.

[Yu Lee, analyst]

Do you think that the Chinese packaging companies are actually doing something different versus the past? Are they moving into HBM or are they moving into like more CoWoS type of packaging that requires different equipment? What is happening there?

[David Wang, executive]

Well, obviously, there's a quite different company. And the certain company moving to this high-density packaging. And obviously, also, we see the company also moving the panel too. So it's a lot of work on this advanced packaging, I call the technology and also the process development.

[Operator]

[Operator Instructions] Seeing no more questions in the queue, let me turn the call back to David Wang for closing remarks.

[David Wang, executive]

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 Relation events. Gary, please.

[Gary Thomas Dvorchak]

Thanks, David. Before we conclude, I just want to give everyone a quick reminder on our upcoming investor conferences. On November 19, we will present at Craig-Hallum Capital's 15th Annual Alpha Select Conference in New York. On November 20, we will present at the ROTH 13th Annual Technology Conference also in New York. And on December 4, we'll present at the UBS Global Technology and AI Conference in Scottsdale, Arizona. Finally, on December 17, we'll present at the 13th Annual New York City NYC Summit in New York. Attendance at the conferences are by invitation only. For interested investors, please contact your respective sales representative to register and schedule one-on-one meetings with the management team. This concludes our call. You may all now disconnect, and have a good day.