ACM Research, Inc.

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the ACM Research Second Quarter 2021 Earnings Conference Call. Currently, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. 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 Dvorak, Managing Director of BlueShirt Group. Mr. Dvorak, please go ahead.

Thank you and good morning, everyone. Good evening in China. Thank you for joining us on today's call to discuss second quarter 2021 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 to the investor portion of our website that we'll reference during our prepared remarks. On the call with me today are our CDO, Dr. David Wong, our CFO, Mark McCagney, and Lisa Fong, the CFO of our operating subsidiary, ACM Shanghai. Before we continue, please turn to slide two. 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 to these forward-looking statements. Certain of the financial results that we provide in this call will be on a non-GAAP basis, which excludes stock-based compensation, a loss relating to a change in fair value of a financial liability, and an unrealized gain 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. With that, let me now turn the call over to Dr. Kim Wong. We'll begin with slide three. David?

Thank you, Gary. Good day and welcome to today's call. We had another productive quarter with solid financial results. We delivered record revenue and shipment with good profitability. Second quarter results reflect ACM growing customer base, technology leadership, expanding product line, and increased production scale. Revenue grew to $54 million. upper 38% year-over-year. Sharements were 82 million, upper from 45 million in the second quarter of 2020. We deliver good balance of growth and profitability with a 40.5 growth margin and 10.4 operating margin. We are committed to drive profitable growth as we increase our investments. in R&D to drive innovation, further strengthen our existing product portfolio, and grow our addressable market with new products. On the bottom line, we reported $0.19 of net income per dilute share, compared to $0.29 in the same period last year. We ended the quarter with $70 million of cash. In addition, we hold the SMIC stock market share worth $31 million as of quarter end. I will now discuss the recent operational highlights on slide three. First, our Q2 revenue growth was a broad base, driving by current and new products and current and new customers. Our wet cleaning and other front-end process tools represent 85% of total sales in Q2. We had a good growth from our flagship SAP product with an incremental contribution from our semi-critical tools. Advanced packaging, other products, and the service and spell grow significantly to 15% of sales versus about 3% last year. The strong growth of this group was driven by advanced packaging tools, including WeatherEdger, Stripper, Developer, and culture and a big increase in our service and business. This first-generation semi-critical and advanced packaging tool accelerated our revenue growth and further strengthened our position as a leader supplier in the China semiconductor industry. The higher mixing of this product, however, partially dilutes our growth margin during this introduction stage. We enter this new market segment. to capture the strong demand from our China-based customer and to deepen the mold that insulates our flagship product from competitors. In cleaning, our newer semi-critical tool extends ACM's flagship steps, TiVo and Tahoe products to cover more than 80% of the total cleaning market opportunity. In advanced packaging, our newer ECP-AP product line extends our current portfolio with highly differentiated products. Put it all together, we remain committed to our 40-45% corporate gross margin target. As a part of our normal product management, we expect improvement in gross margin for our semi-critical and advanced packaging tool. This will come from typing feature content as we early model and build a range of options for customer evaluation. reduction in later generation models. We also expect a cost benefit from volume production. Meanwhile, gross margins for our flagship cleaning product remain consistent with the past period, which we expect to continue. ACM's strategy is to enter a market with advanced differential products, such as our flagship cleaning product, our ECP tools, advanced furnace tools, and other new innovative products. This product allows us to win major customers and provide us the profits to fund future product development. It also allows us to enter middle-range or lower-end products that may come with a lower margin in the early stage, but allows us to capture a much larger market opportunity as we scale the business. We remain committed to our gross margin target, which we believe we can achieve by balancing continuous innovation and high-end with the planned product management, cost, engineering, and production scale. Let's turn to slide five to discuss AACM's growing customer base. We have five major front-end customers in Foundry, 3G LAN, and DRAM. In 2021, we expect our home group and 1GC to remain our top two customers. We expect good growth from them this year. However, each may represent a lower percentage of total revenue as we expect to see significant growth from other customers. We also expect a contribution from SMIC, SK Hynix, and 6MT. Importantly, we recently received new orders for several tools from SMIC for the second half of the year. During the past 12-18 months, our team has done a great job of broadening ACM tool content at SMIC, including a full range of cleaning products and OECD tools. We are getting indication of higher demand from SMIC in 2022, but it is still early. SMIC demand is subject to further licensing progress by them with other U.S. equipment suppliers. We recently added a number of new China-based semiconductor customers who manufacture power, analog, CMOS image sensor, compound semiconductor, and other devices. This customer includes four of five Tier 2 players and a handful of new Tier 3 and other customers. Although each is relatively small, this group of new Tier 2 and Tier 3 customers as a whole could contribute 10% or more in 2021-17. As newer customers are investing in new capacity to support the growth of 5G, IoT, and EV technology. ACM has greater penetration with a range of tools, including SAS, Semi-Critical Cleaning, ECP, and Furnace products. Our third customer group is the advanced packaging and other processing customers. Top customers have included J-CAP, Tongfu, Mappers, and Waferworks. In Q1, we discussed the order from two advanced packaging houses, and we now expect to add more customers as we move through the year. Collectively, we expect significant growth from the group, driving by increased industrial focus. some advanced packaging, penetration of new customers, and a new product cycle for ACECP AP tools. Looking ahead, we believe that our current customer base represents a significant opportunity for ACM. Most of these customers are still in early or middle stage of the multi-year capacity expansions. We remain committed to further broadening our customer base. as we believe every major semiconductor manufacturer can benefit from our technology. Please turn to slide six. We delivered a total shipment of 82 million in the second quarter, a new record in the company's history. Shiman and Q2 were 28 million higher than revenue. The difference largely represents Shiman a first tool awaiting customer acceptance. We view this as a positive indicator as it reflects demand for new products and from new customers. This level of assurance is a testament to HCM's production team at our ChinaSouth factory. We are scaling capacity to meet strong customer demand in a generally tidy supply chain environment. Our in-house high-performance factory and the strengths of our manufacturing team are helping us manage the near-term supply chain Let's give us confidence in our ability to navigate the environment entering the second half of this year. We plan to begin production in the second building of our China Star factory in the third quarter of this year. We have increased our capacity plans and now target a run rate exceeding Q4 of this year that represents more than 500 million of annualized production capacity. upper from 350 million at the beginning of this year. We expect to further increase production capacity in 2022. Our long-term plan is to build a production and R&D center in the Ninggang region of Shanghai. The 1 million square feet of floor space will enable us to increase our annual production capacity to 1.5 billion U.S. dollars. We completed additional architecture and design work in the second quarter with initial production now in the beginning of 2023. Please turn to slide seven. We continue to invest in new products to broaden our offering. Today, I'm pleased to announce Bevel Etcher, extension to our weather product line. This product using a wet etch method to remove dielectric metal and organic material films, as well as contaminants on the wafer edge. AACM's edge approach minimizes the impact of edge contamination for later process steps, and thus, improving manufacturer yield. The beveled edge product leverages AACM's web processing expertise to deliver performance benefits compared to joint approaches. less chemical, and support a broader range of device type and process steps, including 3D math, DRAM, and advanced logic process. We expect to ship our first tool for high-volume manufacturing to China-based logic manufacturers this quarter. Additionally, with ACM-proprietary technology, this new BevelEdge product can achieve more accurate and efficient waveflow centering alignment This will enable a precise bevel edge and will enhance product yields and wafer throughput. In addition, we are currently developing advanced technology to deepen our leading market position in cleaning, which we will add more products to our portfolio in 2022. We remain bullish on our ECB product line. In front-end smaller geometry, require advanced plating solution. Meanwhile, back-end and advanced packaging are becoming more important as the industrial looks for packaging innovation to drive higher performance as the industrial moves beyond Moore's Law. Our ECT product line indicates ECT map, a front-end tool for damaging copper interconnection. The ECT TSV for through-sitting a via also for front-end, and ECP AP for advanced packaging, we believe the total global market for ECP will triple from $5 million last year to up to $1.5 billion in the coming years. Although we did not in the second quarter, we delivered three first tools to three customers. We expect to deliver a higher volume of ECP tools in the second quarter second half this year, with a good revenue contribution from repeat shipment in Q3 and Q4. We also continue to see strong interest for our Ultra FN Furnace joint process tool portfolio. We deliver several first tools, including doped and non-doped poly LPCBD in the first half and expect to deliver additional units as we progress through the year. We remain on track to add a high-temperature oxidation annealing to our furnace product line in the third quarter of 2021. Building on that, the next major development in our furnace roadmap is a batch atomic layer deposition, or ARD process. We view this as the most challenging and promising product for advanced manufacturers. We expect the furnace product cycle to become more meaningful in the 2022 timeframe. We are making significant R&D investments in two major new product categories to achieve our goal of doubling our total addressable market from $5 billion today to more than $10 billion. We continue to bring in top engineering retainers to support these programs. and are confident our team will deliver products and move forward with customer evaluations on the first product line in the first half of next year and the second product line in the second half of 2022. I'm happy to report we made good progress with potential U.S. and Taiwan-based customers since our last call. Despite the COVID-related travel restrictions, our team is heavily engaged in business development. We are confident that we can secure orders from at least one new major first-tier global semiconductor manufacturers in 2021. Before I provide our updated 2021 outlook, let's discuss the status of the stock market IPO of ACM Shanghai. We continue to make good progress. On June 10, 2021, the Shanghai Stock Exchange Commission submitted ACM Shanghai's application for registration with FAMOG ITO for China Security Regulatory Commission, CSRC. Moving on, step closer towards our goal. We are hopeful that the CSRC approves and complete our registration soon. When we receive CSRC approval, we estimate that the insurance process will take another one to two months. Keep in mind that the timing is subject to numerous factors outside ACM Shanghai's control. We are confident that eventual stock market listing combined with our non-stock listing can provide a strong foundation to accelerate our mission to become a major global player in semiconductor equipment industry. Now let's move to our 2020 outlook on slide eight. Our guidance reflects optimism about our growth opportunity for 2021. Based on our strong results through the second quarter and improved visibility for demand and our supply chain through year-end, we have reached our look for the full year. We now expect the revenue to be between $225 million and $240 million. upper from the private range of $205 million to $230 million. The revised revenue range represents 48% annual growth at midpoint. Our updated outlook for 2021 is based on several key assumptions. First, the global COVID-19 situation continues to improve. Second, the stability in U.S.-China trade policy. Third, a range of spending scenario for the production ramp of key customers. Fourth, variance in the trajectory of the DRAM recovery. And finally, a range of timing of customer acceptance of first tool. Our results and outlook demonstrate a successful execution of our strategy. Our strong growth is supporting additional R&D spending on new products. We're building our global sales and marketing resource to penetrate the new customer in new regions. And we are scaling production capacity to support our long-term growth plan. Our mission to become a major equipment supplier for the global semiconductor industry remains on track. To conclude, I would like to thank our employees for their hard work and dedication. I also want to thank our customers, partners, and shareholders for their continued support and confidence in ECM research. I will now turn the call over to Mark to discuss the financial results in more detail. Mark, please.

Thank you, David. Good day, everyone. We delivered solid financial results in the second quarter. Unless I note otherwise, I will refer to non-GAAP financial measures, which exclude stock-based compensation and unrealized gain in trading securities. The reconciliation of these non-GAAP measures to the comparable GAAP measures is included in our earnings release. Now on the second quarter, shown on slide 9. Revenue was $53.9 million, up 37.9%. Revenue for single wafer cleaning tools, which includes SAPS, Tebow, Tahoe, and our semi-critical cleaning was $45.5 million, up 36.4% and $33.3 million. We had no revenue for ECP, furnace, or other technologies during the second quarter. As David noted, however, we delivered three first tools in the quarter and we expect more revenue contribution in the back half of the year. Revenue for advanced packaging, excluding ECP, services and spares was 8.4 million, up from 1.2 million in 2020. Total shipments were 82 million versus 45 million in the second quarter of 2020 and 74 million in the first quarter of 2021. This included deliveries for revenue in the quarter and deliveries of systems awaiting customer acceptance for potential revenue in future quarters. This represents another quarter of record shipments, a great accomplishment by a production team given industry-wide supply constraints. Gross margin was 40.5% versus 49.7%. This was at the lower end of our normal expectation range of 40% to 45%. The decrease in gross margin, as David mentioned, was due in large part to product mix. We expect gross margin to continue to vary on a quarterly basis due to a variety of factors, including product mix and manufacturing utilization. Operating expenses were $16.1 million versus $11.2 million. The increase in operating expenses reflected higher R&D on new products, our expanded U.S. sales team, and legal costs related to our U.S. civil suit and the China Star Market IPO. R&D expenses grew by 52% to $7.7 million or 14.2% of sales versus $5.5 million or 12.9% of sales last year. The increased R&D intensity reflects ACM's commitment to new products and innovation. We expect to continue to increase our R&D spending in 2022. Operating income was $5.7 million down from $8.2 million. Operating margin was 10.5% versus 21%. Unrealized gain on trading securities related to the change in the market value of our SMIC investment was $3.8 million in the second quarter of 2021. Note that we exclude this non-cash item from our non-GAAP results. Tax expense was $15,000 versus $1.9 million in the year-ago period. Net income attributable to ACM research was $4.1 million versus $6.2 million in the year-ago period. Net income per diluted share was $0.19 compared to $0.29 in Q2 of 2020. Tax items and the effects of foreign exchange fluctuations on operating results provided a net headwind of $0.3 million or a penny per share in the second quarter of 2021 versus a net headwind of $0.9 million or $0.04 per share in the second quarter of 2020. We'll now review selected balance sheet items. Our cash balance was $70.2 million at the end of the second quarter versus $78.8 million at the end of the first quarter. In addition to the cash balance, we also had trading securities of $31.3 million related to our SMIC investment. This includes a significant unrealized gain from our original purchase price. Total inventory was $136.9 million at the quarter end, up by $33.6 million from the prior quarter. The quarter-on-quarter increase was driven by two items. First, finished goods inventory grew by $16.8 million to $64 million. This represents first tools that have been delivered to customers for evaluation and are carried on our balance sheet at cost pending potential customer acceptance. The second item is work in process and raw materials, which in total grew by $16.8 million from the prior quarter. This was due to purchases to support shipment growth expected for the remainder of the year. Short-term borrowings at quarter end were 22.1 million, down from 23.5 million at the end of the first quarter. Long-term borrowings were 18.7 million, up 1.3 million from the first quarter. Cash flow used by operations was approximately 10 million for the second quarter, but it was slightly positive for the first half of the year. For 2021, our base case plan for capital spending is about $15 million. This includes $2.8 million already spent through the first half of the year. Our 2021 investments will be primarily focused on capacity increases at our Twancho factories, investments to support our R&D programs and planning, and some initial spending on Lingon. In sum, we continue to execute on our strategy. We are participating in the growth of major new IC fabs. We're ramping production, and we're developing and delivering new products to a growing list of customers. We're positive on our opportunities in China and expansion outside of China. We remain committed to achieving 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.

Thank you. At this time, we would like to take any questions that we have for us today. And as a reminder, to ask a question, you will need to press star, then the number one on your telephone keypad. Again, please press star one to ask a question. To withdraw your request, you may press the pound or slash key. We'll pause for a moment to compile the Q&A list. We have our first question come from the line of Patrick Paul from Stifel. Your line is open. Please go ahead.

Thank you very much, Sarah, and congratulations on the revised outlook. Basically, David or Mark, the equipment industry has gone through a lot of supply chain constraints over the past quarter. Given your results and your outlook, it looks like you're managing through it very well. Can you just qualitatively give a little bit of color of whether you're seeing any supply constraints? Your supply chain is probably a lot different than some of my American companies, but I was just wondering how you saw supply chain constraints during the quarter or if any going forward.

Okay, thank you. Actually, you can see that the market is booming. The components of supply get tighter and tighter, right? So we do see some long leading items get further longer. Uh, so only way we're managing that is that we're, you know, based on our projection cell in the half year, even beyond. And then we're looking for their, you know, early ordering or early approaches, right? And there is a lot of meeting items. So we do see some, um, you know, components get longer, which impact us. However, uh, you know, we get a pretty much good control and we'll continue to see that, uh, uh, Hopefully, this is going to get improved. And at this moment, we feel comfortable about our revenue this year. And actually, we're also comfortable about our shipment this year, too.

Right. That's helpful. And maybe this is my follow-up question for Mark. Gross margins between the 40% to 45% range, a lot of moving pieces every quarter. As we look at the high shipment count, relative to new tools and first-time tools to customers, how do you balance that versus your overall, I guess, normal operations? Because if you get a quarter of multiple systems, that could weigh in pressure on gross margins and take you out of that range. What are some of the steps you're taking to try and ensure that your gross margins stay within your stated range? given the number of source tools and evaluation units out in the field.

Great. So, yeah, Patrick, I'll maybe, David, if you wanted to add to it. But, Patrick, you know, it's an art and a science, certainly. I mean, right now, demand is quite strong, and so we're focused on our production. We do what we can, of course, to balance our revenue items versus our first tool shipment items and to balance the gross margins. But many times, really, our customers have strong demands, and we do what we can to support our customers. So it's very important for us – to focus on innovation at the high end, but then we're also moving to round out the product market to create a moat between us and our competition. So we do feel very comfortable that we can balance all the items to deliver the gross margins in the range, in the 40% to 45% range. David, do you want to add anything to that?

Yeah, actually, you mentioned quite a bit. And I want to add something. Really, this moment, I think for us, we want to get a balanced product portfolio, right? And you see that, you know, say a year ago, most of our shimmy is single wafer canini. And those are normally high margin. And those margins still keep on changing. As we introduce the semi-critical product and also more of an advanced tool in the packaging, and they're studying low margin product come out, right? So we combine together, that's kind of a margin you see, the dilution. However, as we continue to mature our product, even in a semi-critical tool, and also control our cost for manufacturing, and also scare production, plus we're additional innovation product, like ECAP, continue to mature itself, and also advance the furnace come out, and so we'll see that balance continue, right? We believe at this moment we try to also secure our position and also especially keeping competitors getting to our flagship product. It's worth to get this semi-critical or other relatively low-profit product. However, as I said, with our confidence, with our also future innovation keep going, even add a new community function, more of a new feature even to our community major product. then we'll see that margin eventually get back. We're still confident in 40%, 45%. And as I said, continuing innovation and new product development, that will help our margin keep going in the range.

Great. Thank you very much.

Our next question comes from the line of Ken Bolton from Needham & Company. Your line is open. Please go ahead.

on the ECP sort of outlook and hoping you might be able to spend just a little bit more time talking about the ramp that you expect for ECP. Maybe if you could give us a sense how many tools you have, ECP tools you have, waiting customer acceptance and any thoughts whether ECP might be able to get to 10% of revenue next year as it ramps and customers accept tools.

Okay. Okay, you're looking at ECB product. We've got actually a major, I should say, three major categories. Let me clear that. One is the damaging process. We call it ECB MAD, MAD. And the second one we call it ECB PSV, right, major for the DVR, PSV plating. Number three is actually our advanced packaging tool, which we deliver for the packaging, you know, fan out and peel out. or other advanced packing requirements. Number four, we come with actually another copper plating for the compound semiconductor, a relatively small size, six-inch, and mostly eventually you spend eight-inch. So with that, all products, before we expand, this year we see quite a bit of shipment to the new customer. We're looking for, you know, actually probably 20 plus total fuel. And we'll deliver total again this year. And some of them are record revenue. But most of them, I mean, as you say, you know, it's hard to tell right now, but some of them will be technical next year. But again, obviously next year will become a repeat order. And then that will be real added, a bigger revenue a booster or revenue, I call the product, and to our, you know, portfolio next year.

So it sounds like if you've got 20 million plus of tools delivered this year, you know, repeat order.

No, 20, I'm saying not 20 million, 20 tool number, not 20 million. 20 tools. Wow. Okay. Yes. Got it.

That's a lot of numbers, right? Yeah, got it. So we can definitely get to 10% of revenue pretty quickly. Got it. Thank you, David, for that. Mark, just thoughts on OpEx. I know you guys are increasing the R&D to invest in all the new products, but as we look at the quarterly progression of OpEx, can you give us any sense as to what kind of increases you might expect into Q3 and thoughts whether OPEX would increase further in Q4, whether it would follow normal seasonality and maybe tick down a little bit in the fourth quarter. Thank you.

Yeah, I mean, we don't give a lot of detail on our OPEX. We tend to guide on the top line. But, you know, for the year, we think the OPEX would be 28%, 29% of sales, you know, kind of a good mix of R&D. that we talked about, sales and marketing, and then followed by G&A. So, yeah, you don't expect any kind of significant changes in the back half of the year. So you should get a little leverage in the back half of the year on the overall revenue growth. Got it.

Thank you.

Our next question comes from the line of Krish Sankar from Cohen. Your line is open. Please, go ahead.

Hi. Thanks for taking my question. I have two of them. First one, David, on this Bevel Etch using wet chemistry, who are the main competitors? Because it seems like most of them use dry, so I'm just trying to figure out who the comps are on the Bevel Etch process, and then I have a follow-up.

Great. Actually, like you said, I mean, I should say in the last probably 10 years, right, a lot of bivalve ashes by the dry ash process, which I should say, you know, it's pretty good performance. However, you have other tropical remaining, I call it, ashes, right? And then for that portion, how do we get it clean again? But with the wet process etching tool, you are just wet etching process. They can get a much better profile and also give you clean etcher without almost no particle on top. So that's really helping reduce the particle contamination and the etch to the etch dye. For our case, actually also, innovative method, as I mentioned, we have a very precise alignment to control the center or to test the center wafer, and so therefore we can reach much better centering performance, therefore reaching much better control for the bevel accuracy, leading to a better yield. That's our product.

Got it. Very helpful. And then just a follow-up on electroplating. Thanks for the color on the different drivers for electroplating. I'm just kind of curious, David, you mentioned that the electroplating market could triple to $1.5 billion in the next few years. I understand the different drivers like copper, diol, damascene, and compound, but it almost seems like for the last few decades, this market is under half a billion. The throughputs are pretty high. The ASPs are pretty low. So I'm kind of curious, what gets you to a tripling in market size to $1.5 billion? Is it just these four drivers you spoke about, or is there anything else going on, like ASP increases or throughput reduction happening? Thank you.

Yeah, okay, great. I think the major driving force is still from, I should say, probably PSV and also the 3D packaging, right? Obviously, the dimensioning process has been very stable. Obviously, the more volume, more wafer people talk about, that's a continued increase. I think more of their driving, we see here is like all their, you know, 3D packaging. Now they're talking about a peeler from, you know, 100 microns to 200 microns. It's a mega peeler. With this kind of a higher peeler, you need more of a process time into plating such a thicker peeler, right? So also they're talking about 2.5D and 3D. So there's much more 3D application come out for their packaging. Obviously, you know, not only for advanced, I call it, applications, even people today consider even 28nano or even, you know, 14nano, they're trying to combine with the advanced packaging technology to further enhance their performance. So with that in mind, we think that, you know, this market continues to grow, right? And people project that this year, probably when we reach 700 million as a total, you know, financing and the packaging altogether. So we're very see that as a growing opportunity. Again, because pretty driving by the whole small law, right? People focused on a lot of the bulk packaging approach.

Very helpful. Thanks a lot, David. Thank you very much.

Thank you.

Our next question comes from the line of Charlie Chen from Morgan Stanley. Your line is open. Please go ahead.

Thanks for taking my question and great results. David, good evening, and Mark, good morning. My first question is about the lead time between your shipment to the revenue. So maybe, Mark, can you please remind us what is the lead time?

Maybe I'll give you the first mark. At this moment, I should say our average is this time around six months already. And again, some specific product, shorter or something, maybe longer. It's about two months longer than our previous four-month timeline. So that's the answer now. Hopefully, as time goes on, we can shorten that product cycle At this moment, it's still, I should say, supplying a certain long-living item and taking much longer time to get it in hand. That's a major reason.

Okay, thanks. Yeah, so I ask this because you talk about your annual lifestyle production, right? So if I look at second quarter, your shipment is above $80 million, and the full year is production is exactly $350 million. So I'm thinking that when you try to expand your analyzed production to $500 million, my question is that when will companies of revenue scale will hit $500 million?

Wow, that's a tough question. Again, right, I mean, Shiman, the member, would normally do another real, I call it a final release at almost the end of the year, right? So I can tell you this year our Shiman is much, much higher than last year. And the actual number, I still say, might be waiting for our Q4 early release. But then you mentioned $50 million revenue of Shiman, right? Let's be careful. So, you know, if it's a shipment, you know, probably easy to reach, right, hopefully within next year. But revenue-wise, we're still, you know, based on what you say. A lot of new products and new customers are rare recognition at the time, right? So, again, I can see that a lot of shipment going on, but revenue-wise, we'll give you probably by early next year. Then we see more visibility of what is our, you know, sales order next year.

We have our next question. It comes from the line of Donnie Tang from Lemur Securities. Your line is open. Please go ahead.

Thank you, David and Mark, for taking my question. My question is related to customers. In your prepared remarks, you mentioned about that you recently received new orders for several tools from SMIC for the second half of the year. I'm just wondering, is there any approval granted by SMIC's US suppliers so that they can start to procure more equipment from ACM Research as well? Or is there any other reason behind? And for another customer like 1TC, I think what WMTC is running out of is phase one capacity expansion, maybe by the end of this year or maybe sometime next year. So just wondering if you could kindly give us some update on maybe when will WMTC start the potential phase two capacity expansion? So this is my first question.

OK.

Okay, well, again, regarding licensing, there's a lot of different information flowing in the market, right? And we do see some, you know, anyway, our same player in the industry, they said they got a license for the entire tool or for the big tool. And also we heard that some even component supplier, they also get their license too, right? You know, maybe a four-year one-time license. So, again, you know, we see that there, I call that attention get released. But, again, you know, I don't know all this total product, you know, and the estimates going to buy, how much percentage, you know, get, how much you're not yet. So, that information, I really cannot comment. You know, that's what I heard so far, as far as I'm seeing. But, however, we do have indication, and they're trying to expansion, you know, their demand, their customer, they really demand their capacity, right? So next year, they do have an expanding plan going into next year for SMC, right? So we'll see. Probably as the timing reaches the end of this year and also maybe Q3, we can see a more clear picture on that. Regarding 1PC, as we know, their phase 1 factory is almost full, occupied, right, by capacity. And probably end of this year, that the first phase one fab is going to fully load it. Then, you know, if you look in the building, right, I can only say what I say here, right? As I be careful what is confidential. So even looking outside the building, the building next one, that in the process. So, you know, by that a building, a second building right now, we probably can say probably end of this year, they can finish that construction. And then, again, we're as a major supplier, we're expecting, you know, after they finish construction, they should be expanding their second fast. Recently, I heard that they will make a successful 128-layer, you know, manufacturing, right? So, with that technology being, you know, developed, it's very natural thinking they could continue expanding their 128-layer, you know, mass production. And obviously, you know, this is a racing game. We're also expecting that going to even, you know, 198 or even more of layer R&D, you know, for the coming year. So, 1PC is a very good customer for us, and we have a very good relation. And also, we're expanding our product portfolio, right, not just only Canadian product, and we're expanding also other, like, copper plating and also other furnace products, you know, eventually getting the, you know, the YMTC. Also, you know, all the new advanced requirements, especially for the one, you know, 225 layer and above, we're doing very good, I call it planning, to improving all products we have today to make sure we can meet their requirements, right? You know, two years, three years from now, you know, probably that time, 300 layer, even more. So we're working very close and to join develop, you know, our new product to meet their future requirements.

David, I have one follow-up on SMIC. So when you say that you receive new orders from SMIC, is that for like the Shanghai FAB, the most advanced Shanghai FAB, or is it for like Beijing, you know, more mature nodes like above 28 nanometers?

Yeah, we got actually from Beijing, them mature nodes. And also I say that the expansion plan, as I mentioned, right, they're compiling also their, you know, Beijing is the most that happened. Maybe it sends in, right? That's what we heard so far.

Okay. And my second question is probably for maybe longer-term business expansion, right? So I think based on your sales scale, right, if we consider you have maybe like 80% of sales roughly from wafer cleaning tools, then I guess it probably was translated into like at least more than 10% of the market share in China already in terms of a wafer cleaning tool. So I think probably you are the biggest, already the biggest one, and continue expanding market share in China domestically. But I think that kind of market share has been pretty high, right? So inevitably, you need to expand to more new product for portfolio, as you just mentioned, like ECP advanced packaging, But on the other hand, previously that you are also trying to penetrate into overseas leading semiconductor customers. So I'm just wondering which targets are the priority right now? And could you kindly give us some update on your expansion in the overseas market? Thank you.

Great, great. Okay, I should say both important, right? Both the market in China is important and also outside China is important. And actually, our long-term goal, let me give you the long-term goal, we are trying to make our revenue 50% come from, you know, China market and 50% from outside China market. And that's why we're actively, you know, actually hire building a strong team in the U.S., to approaching the leading customers in the U.S. Also, we enhanced our team in Taiwan, too, right? And plus, recently, also, we have further enhanced our sales team in New York. We believe our core all-provided technology, like SAFs and T-Bone for 3D cleaning without damaging, and also a powerful product, you know, with our, I call it a super-saving process. And also, and where I should say that, we also add additional new function, new requirement, and for the strengthening our Canadian product, right, in the month notes too. So with all the innovation in hand, we try to first demonstrate, you know, probably in the China and the Korean market, and we believe our product will eventually, will be in a pantry that all major companies in the world. We believe it. Every key customer, they need the best technology, right? As I said, again, all provider technology and there is a real unique approach we're providing. And with all the benefits, we think our differential product will get into the market outside China, right? And we're very confident and we see that in a big movement and also building us all the time in the U.S., So we definitely want to participate better in a growth market in the U.S. And also, obviously, you can see the growing market, you know, in Taiwan. And also, you know, and there are potential maybe something happening in Europe, right, that people talk about it too. So as ACM today, really we're, again, equal important. Even revenue major come from mainland China right now. However, we do see our future growth and also what comes from outside China.

I have a follow-up. Because previously, impression is like you put more focus on expanding overseas customers. But in past few quarters, it looks like our new products or our new equipment expansion to be faster than expected. So we put more emphasis there. I'm just wondering, is this kind of situation a correct way to say, or does that mean that our schedule, you know, qualification schedule with the overseas customers continuing to be postponed?

Well, again, right, I say, you know, we're working closely, right? Again, you know, it's not a final maturity yet. But again, you know, I think we're making progress, right? And when the timing and the reaching, you know, we're going to announce that. At this moment, I said that we're very working closely with the customer.

Great. Sorry, we should probably move on to the next question, please. Yeah.

Once again, I would like to remind everyone, if you wish to ask a question, please press star 1. We will now limit the question to one per participant to allow for other questions to be addressed. Our next question comes from the line of Chaolin Cheng from Credit Suisse. Your line is open. Please go ahead.

Okay. Thank you, Lisa and Chaolin. So, Debbie, you gave us some color on SMIC and YMP, and can you talk a little bit about ZXMT? Because I'm just curious that SA has been doing pretty well with all the other major guys in China, but it seems that the business is a little bit slower with ZXMT. Thank you.

Yeah, actually, you know, uh, we do see that, uh, people pick up, right? And probably you'll see it in two locations. One is Beijing, one is Hefei, right? And, uh, again, uh, we're working close with them. I will see that, uh, you know, some, some, uh, I call order we're already receiving and from Beijing, they're, you know, Beijing new factory too. Um, I know they have a bigger 40K expansion, right? And that, uh, that'll keep going and, um, They partially released that order. We're saying probably most of it will happen next year, but they're continuing improving their technology and improving their capacity. So we're safe, right? And we're working very close with them, too, our communion product and also our carbon plating. And also we'll further try to work with them together, expanding our furnace product, getting to their production line, too, for their evaluation. So it's good for the customer, and hopefully eventually they become a top customer for us in the coming year soon, right? So that's our effort to put it here to win the customer, you know, at 6MP.

Thank you, David.

Our next question comes from the line of, Sujita Silva from Roth Capital. Your line is open. Please go ahead.

Hi, David. Hi, Mark. Congrats on the progress here. On the global customer, I know you said you're going to ship in calendar year 21, and since you have six-month leads, I guess you have the visibility there. Just trying to understand if this is a production volume or a pilot volume. Is it SAP's TiVo or back-end, advanced trailing node? That kind of color would help. Thanks.

Wow. And I really couldn't release any product, right? You know, obviously, NDA control, even if it's not allowed, I talk about which product, you know, they buy. But anyway, you know, when I can say that product is a convenient tool, and, you know, that will be the evaluation tool. And hopefully, you know, it will be end of the repeat order PO. And that's a typical process. You know, first of all, the evaluation, even liking the product, they've got to, you know, all the production verification, then we'll hopefully get a repeat order, right? So anything will repeat what doesn't happen next year, right? That's what we're expecting. Again, you know, it's a good opportunity. That's why we're doing very good effort and make our team really self and also servicing and all other related, you know, logistics supporting, right, for this to happen.

All right, David, appreciate that caller. Thank you so much. Bye.

Our next question comes from the line of Chi Chai from Jeffrey. Your line is open. Please go ahead.

Hi, David. Hi, Mark. We were taking a question. Could you give us some color on your Asia ideal? You said it's going to take another one to two months. So, can you share what kind of process you are left with the CSRC? What's it going to take for the IPO to go through?

Okay, good. So, Chi, actually, as I mentioned, you know, in June 10, right, with actually the FFDC, right, Shanghai stock changing, they submit the application, right, to the CSRC. So, we're going through question and answer. Actually, so far, the question gave us all answers already, right? And now, I think probably in their internal procedure process and to get a final proof. And also, just two days ago, we also submitted a Q2 financial review, right, and to this CSRC also. So we'll see. Maybe, you know, they come in with some questions, come back, you know, to our Q2 data. And anyway, we're prepared for that. Again, you know, ACM probably is the first U.S. company, you know, has a headquarter in the U.S. They also have, you know, another IPO with their subsidiary in Shanghai, and they applied for a stock market IPO, right? I'm pretty sure this is a really unique and first case. So it's reasonable, right? They take more time, consider, and take more of a cautious effort. I especially will have this, you know, this, I call it a short-serving report come out, right? All things, you know, put together. Anyway, we have confidence. As I said, you know, we're a good housing company and good technology and with our strategy. And I think, you know, we should be overcome and just, you know, I call their, uh, uh, you know, eventually get IPO in the stock market. Do I believe that will be both really benefit, uh, our real run, our expansion plan in China. And, uh, you know, that's their, that's, that's where we believe in, uh, will be there in a way and way. Right. And for the customer in China and, uh, our, uh, our financial investor in the U S and also ACM global growth. So it's a, it's a good, uh, um, thing to try to work hard and make it happen.

Yeah, thank you very much. My second question is regarding your R&D expense. I think you have a very big job on your first half R&D expense. I think that's very positive given you are extending your product portfolio. But can you give us some color on your long-term R&D expense? Will it stay, let's say, like high meetings going to, you know, next two, three years?

Yeah, good question. Actually, let me put this way. As I mentioned a couple of, you know, earlier calls and previous times, we want a balance, right, and profitability and also growth opportunities, right? So I think probably last two years, you can see about 10%, 11% R&D. And this quarter, we get into the 14%, right? So I think probably 15% is a good range for us to stay, right? Why? You got to, you know, and this goes margin 40%, 45%. You know, this is all operations coming together. You have to get a 10% plus, right? That's kind of a profit rate there. So we've got a balance in the hand, and that's probably give you, you know, 50% is our probably number we try to be keeping for next two or three years. But let me add another difference for other big guys. We spend on the money very efficient, right? Look in the last two or three years, we're developing copper plating, and we develop the furnaces. We spend also semi-critical in the cleaning process. Also, by end of this year, we're pushing additional new cleaning function, other, you know, even dry technology come out, and with our cleaning product. We are spending very efficient money. We spend every penny and dollar to maximize our R&D effort. So I think, you know, 50% is a good number, and we can, you know, without spending, we have a confidence, you know, we're getting to our new product come out on the timeline. And also, I think our key for our success or R&D is we always get an innovation product, right? Always, I call it defensive. We don't want to get me too. That's number one. Number two, we also have a very good team and working in Shanghai and working with a Korean market and a Korean oil site. So that really gives us a strong R&D effort and then really speed up our product and market. That's really, I mean, historically it demonstrates that. So with continuing innovation, we are very confident, right, we'll continue pushing R&D to the next level with a new innovation product coming out.

Thank you. That's very helpful.

I hope we have a good result.

Thank you. Our next question comes from the line of Christian Schwab from Craig Helm Capital. Your line is open. Please go ahead.

Hey, great quarter, guys. I'm trying to sneak in two quick questions. I'll just ask them quick. Recent news about a leading customer's bond default. Is that potentially going to have any impact on you is question one. Question two is what happens if YMTC gets put on the entity list? Is there any way to ship to them?

Mark, you want to answer that?

Yeah, I can start, and then if you finish. But, yeah, the first one on the bond defaults, David's talked about that on prior calls. We're pretty confident that the operations of that customer are solid. And, you know, our general thought is that – the financing will be available, hopefully, so long as the operation continues to execute, that they can seek funding from other areas. And it's more of about an ownership issue rather than a funding operation issue. In terms of the entity list, it's It's, you know, they're an important customer. YMTC is an important customer. You know, I think David talked about we expect growth, but likely a lower percentage. We're monitoring closely, and hopefully they don't get put on the entity list. You know, we feel pretty confident, given our manufacturing operation in Shanghai and a lot of our technology came from there, that we might have some more flexibility to shift to, you know, should they get put on the list. But, of course... You know, it is dependent upon, you know, their ability for the other suppliers to get licenses. So, you know, we'll monitor it closely and, you know, we'll update if necessary.

Great. Thank you for letting me sneak in two quick questions. Again, congrats on a good quarter.

Great. Thanks, Christian. Thank you.

That wraps up our Q&A session. I'll turn back the call over to Gary.

Guys, I think that's it.

Thanks to the operator and everyone for participating on the call. I just want to mention some upcoming investor relations events. On August 24th, we're going to present at the Needham Second Annual Virtual Semicamp and EDA Conference. On August 31st, we'll present at the Jeffries Virtual Semiconductor IT Hardware and Communications Infrastructure Summit. In addition, we'll present at the Jeffries Asia Forum on September 9th. and the 22nd Credit Suisse Asian Technology Conference on September 10th. Attendance at these conferences is by invitation only for clients of each respective firm. So interested investors, please contact your respective sales representative to register for one-on-one meetings to secure time. So this concludes the call. Thank you, everyone. You may now disconnect.

Thank you. Bye.

This concludes today's conference call. You may now disconnect. Have a great day.