ACM Research, Inc.

Good day, ladies and gentlemen. Thank you for standing by. And welcome to the ACM Research Third Quarter 2022 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're 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 the Blue Shirt Group. Mr. Dvorak, please go ahead.

Thanks, Lisa, and good morning, everyone. Thank you for joining us on today's call to discuss third quarter 2022 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'll reference during our prepared remarks. On the call with me today are our CEO, Dr. David Wong, our CFO, Mark McKechnie, and Lisa Fong, the CFO of our operating subsidiary, ACM Shanghai. Before we continue, please turn to slide two. Let me remind you that the remarks made during this call may include predictions, estimates, and other information that might be considered forward-looking. These forward-looking statements represent ACM's current judgment for the future. However, they are subject to risks and uncertainties that could cause actual results to differ materially. Those risks are described under risk factors and elsewhere in ACM's filings with the Securities and Exchange Commission. Please do not place undue reliance on these forward-looking statements, which reflect ACM's opinions only as of the date of this call. ACM is not obliged to update you on any revisions to these forward-looking statements. Certain of the financial results that we provide on this call will be on a non-GAAP basis, which excludes stock-based compensation 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 slide 12 in the supplemental deck. With that, let me now turn the call over to David Wong, who will begin with slide three. David.

Thanks, Gary. Good afternoon, everyone, and welcome to ACM's third quarter 2022 Earnings Conference Call. I will start with the New China Trader Restrictions issued by the U.S. Department of Commerce Bureau of Industry and Security in October. The updated export controls cover equipment and parts subject to U.S. export controls, including items from U.S. and the activities of U.S. personnel. Based on our preliminary assessment, the new policy restricts export U.S. parts for tools delivered to advanced node facility or for tools that meet certain ECCN parameters. Some of our Siemens will be impacted as our tools currently have 5 to 10% of the components sourced from the US and we produce some tools in certain ECCN categories. Let me provide more detail. First, some of our customers have advanced node facilities. Shipment to this facility may be impacted due to U.S. export restriction. As advanced node facility is defined as building where production at their restricted technology level occurs. The policy does not apply to other customer building with mature nodes. However, even when they are on the same campus. Second, some ACM Shanghai products needed a parameter of a certain export control classification number or ECCN number on the commerce control list. Treatment of this tool may also be impacted if those tools need parts from the US. This may include our ECB tools that specifically support cobalt metal plating, several furnace products, and one of the new platform products that we plan to introduce. It does not include our cleaning tools, most of our ECB tools, our WFP tools, or other new platform product we plan to introduce. Third, the policy restricts U.S. persons from facilitating shipment and servicing products involved with advanced nodes or list the new DCCN number. We have no U.S. employee in our Shanghai and Korea R&D teams. Therefore, the impact from the new U.S. person policy is minimal. We have, however, implemented compliance protocols concerning U.S. persons' involvement in facilitation, treatment, and services supporting activities. We believe the new policy will not impact treatment of ACM Shanghai tool that do not have U.S. parts or do not include the strict activity of U.S. persons. And we believe that ACM Shanghai tools that are not in the restricted ECCN category can be shipped to the mature nodes even with U.S. partners and U.S. personal involvement. I will now move on to the third quarter highlights. Listen to slide three. Our third quarter results were record for the company. Revenue was $134 million of nearly 100% driven by our flagship Canadian tools and strong growth from our new ECP and furnace products, which tripled. Shipments were 163 million compared to the 99 million last year. Growth margin was 49.3%. Gap operating margin was 23.7%, and non-gap operating margin was 25.1%. And we ended the quarter with 473.2 million of cash equivalents, restricted cash, and time deposits. From first nine months of 2022, revenue grew 70%, Canadian tool grew 56%, ECAP and the furnace tool grew 316%, and it contributed to 20% of sales. We had three 10% customers, which together accounted for over 30% ourselves versus 66% mixed for the same period last year. We made a good progress with our initiative and a major semiconductor manufacturer outside mainland China. The evaluation of two Canadian tools and a US factory of their large US-based manufacturer is going well, and we are gaining traction with the potential new customers in Europe and other regions. In Q3, we launched our first ARD furnace product. ARD is one of the fastest-growing applications for manufacturing advanced nodes in memory and logic, making it a critical new capability for our furnace portfolio. We delivered our evaluation tool to a top-tier China-based foundry manufacturer and targeted qualification in 2023. This is the first in a series of furnace ARD tools with a product line extension ahead. We expect our furnace ALD product to make a good contribution starting next year, with ALD technology expected to represent about half of the total furnace market. Furnace ALD offers significantly higher throughput than traditional single-weaver ALD tools and presents a compelling value proposition. We believe that ACM's ALD furnace with proprietary technology can narrow the performance gap between furnace ALD and their single wafer ALD. Next, we plan to grow our operation with investment in new facilities. Construction of our Lingam production and R&D center is in full gear and remains on track for initial production in the middle of 2023. I also want to announce we are close to purchasing a new headquarter in Zhangjiang, Shanghai, the Silicon Valley of China. We are committed to the China market and this new headquarter will provide stability for employees and help us attract new talent. We are also in the final stage of selecting a site to expand our R&D and production facility in South Korea. Lastly, we are on track to double our address of market opportunity with upcoming introduction of two new product category planned for later this year. Now, I want to provide more thought on the impact to our future business from new U.S. restrictions. We expect a temporary pause in some customer as industry adjusts to the new policy. ACM Shanghai is committed to complying with new regulations and meeting the demands of its customer base. We are actively managing our supply chain to source compliant components to ensure maximum assurance of our tools. For mature nodes, we expect a fairly quick recovery. Most of our business has been for 28nano and above logic devices, 96 layer or less 3DNet and 90 nano and above DRAM. Looking forward, we expect our China customer to continue add or even speed up capacity as the mature nodes. This is because mature nodes made in China is much lower than China's market consumption. And we are strongly in position to participate in this opportunity. For the month nodes, we remain committed to participating in that market in full compliance with the new U.S. export control. ACM is focusing more effort to bring its advanced technology to leading-edge FAPs of global customers. We are making good progress with U.S. and European customers and expanding our global sales and support teams. We are also accelerating our R&D and production facilities in South Korea to be close to several major semiconductor players. and provide a second site to supporting worldwide customers. I will now provide our outlook. Please turn to slide six. As a result of new US trade policy and supply chain constraints, we have lowered the upper end of our full year revenue outlook. We now expect 2022 revenue in a range of $365 to $385 million versus the previous range of $365 and $405 million. The range of the company's 2022 outlook reflects, among other things, the impact from the new U.S. trade policy, supply chain constraints, various spending scenarios for the production ramping of key customers, and the timing of acceptance of the first tool on the evaluation in the field. and assuming stability with respect to the COVID-19 pandemic in China. Now, let me turn the call over to our CFO, Mark, who will reveal detail of our third quarter results. Mark, please.

Thank you, David. Good day, everyone. Please turn to slide five. Unless I know it otherwise, I'll refer to non-GAAP financial measures which exclude stock-based compensation and unrealized loss on trading securities. A reconciliation of these non-GAAP measures to comparable GAAP measures is included in our earnings release. I'll now provide financial highlights for the third quarter. Revenue was $133.7 million, up 99.5%. Total shipments were $163 million versus $99 million in the year-ago period. Revenue for single-wafer cleaning tools, which includes Saps, Tebow, Tahoe, and semi-critical cleaning, was $99.7 million versus $49.5 million. Revenue for ECP, furnace, and other technologies was $24.5 million versus $8.2 million. Revenue for advanced packaging, excluding ECP, services and spares was $9.5 million versus $9.4 million. Gross margin was 49.4%, up from 44.5% in the prior year. This exceeded our normal expected range of 40% to 45%. The increased gross margin versus the prior year period primarily due to a higher mix of ECP, front-end packaging, furnace, and other technologies, and a positive impact due to a change in the remnant B to US dollar currency exchange rate. 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 $32.6 million versus $16.7 million. Higher R&D due to tools built for product development, additional engineers, and other factors, together with higher sales and marketing due to promotional tools and personnel costs, contributed to the growth versus the prior year period. Operating income was $33.5 million versus operating income of $13.1 million. The large increase was due to higher gross margin and leverage in our top line. Operating margin was 25.1% compared to 19.5%. Unrealized loss on trading securities was 5.3 million. The loss reflects the change in market value in the shares of SMIC, which are owned by ACM Shanghai. The value is marked to market quarterly and is excluded from the non-GAAP results. Realized gain from sale of trading securities was 1.1 million. due to the sale of a portion of SMIC shares which generated net proceeds of $4.5 million. Other income expense net was $7.2 million. This reflects $6.4 million due to gains recognized from the impact of exchange rates on foreign currency-denominated working capital transactions versus $.3 million in the year-ago period. Income tax expense was $10.5 million compared to a benefit of $0.3 million in the year-ago period. The effective tax rate for 2022 has increased primarily to a new requirement to capitalize on amortized previously deductible research and experimental expenses under IRS Code 174, which became effective on January 1, 2022. The company's tax provision for the nine months ended September 30, 2022 assumes the rule will not be overturned and is based on capitalization of all R&D expenses for tax purposes. Net income attributable to ACM research was $28.2 million versus net income of $12.4 million in the year-ago period. Net income for diluted share was $0.42 compared to net income for diluted share of $0.19 in Q3 of 2020-21. I will now review selected balance sheet items. Cash, cash equivalents, restricted cash, and time deposits $473.2 million at the end of the third quarter versus $468.9 million at the end of the second quarter. Total inventory was $327.8 million at quarter end, up from $288.1 million at the end of the last quarter. This included finished goods inventory, $109.2 million, work in process, $73.5 million, and raw material of $145.1 million. Net cash used in operations was $2.2 million. CapEx was $13.2 million due to construction in Linggong and other facilities. For the full year, we plan to spend $30 to $35 million in total CapEx for Linggong and other facilities. There may be additional CapEx in the fourth quarter should we close on our new headquarters in Zhongjiang. That concludes our prepared remarks. Now, let's open the call for any questions that you may have. Operator, please go ahead.

Thank you. If you would like to ask a question, please press star 11 on your telephone. One moment while we compile the Q&A roster. At this time, the first question will be coming from Quinn Bolton of Neham and Company. Your line is open.

Hey, David and Mark. Congratulations on the strong near-term shipments. Obviously, big, big questions, I think, for a lot of us on the line are, you know, the impact of the export controls and it looks like it's certainly having an impact on the fourth quarter as you take the midpoint or the range for 2022 down. I guess a couple of questions. One, as you look at 2023, I know you haven't given 2023 guidance, but could you give us some sense what the impact of the new export controls might be on 2023 You know, is that $50 million? Is it $100 million of potential business that could be affected? And then the second question is just, can you give us some sense of the split between what percent of revenue is affected from shipments to advanced facilities in China, the DRAM, the 128 Larinand, versus how much of the impact is due to parts that contain, or sorry, tools that contain U.S. parts and or the new tools that are affected by the ECCN classifications? Sorry for the long questions, but hopefully you get sort of what I'm driving at.

Okay, well, let me cover the first one and maybe they're logging it out, right? I mean, our revenue projection for the next year forecast normally give a January timeline. This moment, I think it's still too early. Probably can't give too much detail this moment. I want to mention there, looking at this restriction, actually I can see that definitely some advanced nodes production plan will probably get a slowdown. However, as I mentioned in the script, China has a lot of mature nodes and chip consumption in the market. China imports almost 60% of global of their chips. So for those mature nodes, I think would be big potential and also a lot of the electrical car and also a lot of commercial product using the $29 and $45, right? So we see that it would be still continue to grow, even possibly speed up and this potential of the fiber buildup. So also our technology monster, you know, this moment real service for those who know to be proving and we're, we're positioned as this kind of a market. So therefore I will see that the mature nodes will continue to grow and even speed up. And that definitely is something in advance and we'll get it sold out. So combination, together i still say acm is doing the growing growing pace and in the in the china market right that's i i view there uh for the market we're talking here um then at the same time you know we have to also increase you know our two new products online and that's probably introduced very soon and you know by end of this year so with a new product add-on to a product portfolio We have also multiple products in the market. That will give us more of a revenue stream probably in 2004 and for the two new products. And also recently announced ARD, I call it the furthest product. And that's also giving us revenue in 2003, 2004. So we're still keeping our confidence in what we have in the market in China. We have very, you know, I call it R&D engineer and also together with the Korean engineer and also very preparation for the real this mature nodes participation in material growth. But meanwhile also we're trying to expanding our advanced nodes right in the international market right especially with we have a building our Korean fab and Korean R&D facility. So for that reason I will say where, you know, we still can continue R&D and for their service to global customers, and we want to steal our differential product and to service it for the entire, you know, industry. I'll give you the first question. Okay, Mark, you want to cover a second question, or you want anything to add on that?

Yeah, I can. No, thanks, David. Yeah, I think Quinn's second question was about what percent of our tools were going to advanced nodes, and I might... It's hard to measure, but it's a pretty small percentage, right? And so, you know, the majority of our business has been to, you know, the more mature nodes. But I think as everyone knows, you know, and ACM is in a good position, you know, where we've got some flexibilities, you know, we can ship a lot of products where others can't. we're going to be impacted by the overall spending at our customers, right? So, for instance, if they can't get certain tools from other players, you know, their spending, we would expect it to pause for a bit, as David mentioned in the prepared remarks. So, I guess kind of bringing it all together, you know, looking out to 2023, as David noted, we'll give the guidance like we always do it at the beginning of the year, but But we're planning for some growth. And we'd expect there to be a bit of a pause in the first half as the industry adjusts and works to get their licenses. And as the customers work on, for instance, fabs, buildings that don't have the mature nodes, right? And so they can have almost what you would call a compliant fab. So we're watching that closely, but we'd anticipate kind of a pause from some of the bigger customers. You know, some of it hitting this quarter and some of it carrying through into the first half of the year. But as David noted, we'd expect the spending and the industry to start being able to support the mature nodes of those customers as you move through the year next year.

Let me add on our U.S. parts ratio. And we are proud that normally have a five, 10% us, uh, components. Right. So, um, clearly if we're not, you know, wherever actually our cleaning product is not an ECCN category. So for our major revenue, and we still can using us pods and also use the person involved to sell those apart to either a mature notes customer. Right. And as a matter for those, uh, probably, you know, our, our Chinese, uh, engineer or. our Chinese staff there's their activity to building tool for the launch nodes and then they will have to you know this moment cannot get any parts from us so they probably have to choose into other compliance supplier you know can be you know any other area and we do have found some some parts in China in China locally yeah it is something will take time and but there As I said, this can be taking probably a year, maybe a year or two. However, it really depends on how their vendor and also this commercial supplier, how they fast and quickly react to this change. I should say, I still consider USPath's impact. It's kind of compared to other guides that were pretty much minimalized, but we'll work on that.

And one final quick clarification, Mark and David. For the parts that are under the ECCN classifications, those are the tools where you cannot source U.S. components. Is that right? So it would only be, for instance, the COBOL ECP tool, not the rest of the ECP line. And then I think you mentioned one of the two new platforms may also fall under ECCN. I'm just trying to get a sense what shipments for ACM are affected and where you are free of restrictions.

Yeah, actually, like you said, this is a copper-plating cobalt, right? It's really targeting probably 7-nano, right? In this moment, I'm not expecting higher revenue in China, obviously. So a lot of, like, 28-nano or above, those nodes is all copper plating, right? Even in their 60 nano, 40 nano, uh, fern fat is still copper plating in other words. So I should say, you know, our copper plating is still okay. It's not an ECCN and the alkaline not in there, right? And our new product we can introduce doesn't ECCN, right? So, uh, in this case we have to really saw the other US path out. And, uh, as I said, again, Even in our new product, we're talking about ECCM, U.S. probably, I would say probably 10% range, right? Almost like that. So it still can be possibly, you know, find the other alternative choice. And obviously need to, you know, qualify, need it to be, and working with the vendor, you know, and gather those things to be qualified, right? That takes time. And however, we think it can be solved.

Understood. Thank you, David. Thank you, Mark.

Yep.

Thanks, Gwen.

Thanks, Wayne. Thank you. As a reminder, if you have a question, please press 511 on your telephone. One moment while we prepare for the next question. Our next question will be coming from Suji DeSava of Roth Capital. Your line is open.

Hi, David. Hi, Mark. Congrats on executing in an obviously very tough environment here. Can you guys talk about the Korea footprint for R&D and tools? What are the remaining steps in the timetable there for readiness, or is it already ready? And will the mix of tools shipping out of Korea, is it planned to be similar to Shanghai, or is it leaning more towards the leading-edge nodes?

Okay, good. Actually, you know, the Korean, and we started Korean subsidiary in 2017, right? And since then, we couldn't hire people. And today, we have about almost 110 employees in Korea, in which 60% are R&D. So Korea has about a 3,000 square meters facility. Actually, we can manufacture our Canadian tool. And the future project can also manufacture a copper plating tool. And also, we have a dryer. This is a furnace, an ARD tool. and most portions are also made in Korea and some portions are made in China. As time goes on, we do have two new introduced products. We have not given a name yet. And those two new products also can be manufactured in Korea. So I think Korean R&D manufacturing base, by the way, also finding the one land in the final phase for the government approving for license. And after that, we're building also another, a second manufacturing center in Korea, right? So with this preparation, I think we're positioned to have a Korean to make a tool, of course, can sell back to China, right? And also we're also prepare and the tool made in Korea to be sell to Taiwan and also tell to the, I call it US, a European market, right? So at this moment, I think we have two manufacturing centers, one in China and one in Korea, and also we'll do more effort to work with the Korean top players and their customers here, and also to do the R&D research and advance notes. So that will be the real second center for us expanding the global market. Mark, anything you want to add on that?

I think you hit it there. I mean, I guess maybe I'd mention that just having a second production center, I think, is pretty attractive to some of our international customers. And so that'll help us drive our international business.

Okay. Thanks, David. And my second question is around, I think in the prepared remarks, you spoke about first tools taking longer for acceptance. Is that simply an offshoot of the the kind of reassessment with export controls, or is there something else going on there right now more generally?

Tsuji, I don't think we've said anything specific about first tools taking longer for acceptance. I think when David commented on the outlook, he attributed it to supply chain constraints and the new U.S. policy, but we didn't mention anything about delayed acceptances. Okay.

I may have misheard that. All right. Thanks, guys.

Thank you.

Thank you. One moment while we prepare for our final question. Our final question will be coming from Crystal Schwab. Craig Neham, please go ahead.

Hey, good afternoon. Good morning. Mark, can you just tell us where all the cash is? in the use of funds and whether we can bring some of that back to the United States to do a meaningful stock buyback at some program. Can you just refresh us on the use of the significant cash balance?

Yeah. Hey, David, maybe I'll... He's asked... Hi, Christian. Yeah, go ahead.

I'll cover something. Maybe you can tell where's the cash, right? Okay. Well, basically, you know, they're The cash we have is mostly proceeds of the stock market IPO last year. And those money belongs to a subsidiary. And you do have other tempered 17.5% of minority investing there. So we cannot directly bring this cash back to the major shareholder as USA. So we cannot do that. you know, as time going on, we have a profit generated in China, and we do can, well, we can bring some dividend back to U.S. And last year, we didn't do anything, but, you know, we're still considering, and this is one option, and putting cash back to U.S. Not necessarily, you know, real buyback share, really important when we're trying to enhance our R&D and also self-effort and to exploring further, you know, U.S. and European market. And that's what he would consider. Anything else? Mark, you want to add on that?

Yeah, I can. Kristen, so we break out our cash by geography in our queues. And so at the end of June, we had almost $30 million in the US. It was $240 million in mainland China. We also had some cash in Hong Kong and South Korea. But as David noted, uh, you know, the U S cash, uh, you know, we, we, we, uh, you know, we, we plan to use that to grow our business. You know, we're, uh, evaluating, uh, a couple of tools at a pretty major, um, potential customer. And so, um, you know, we've got a small services team in place, uh, but that, that cash is good, um, allow us to, um, you know, run some pretty, uh, long-term, uh, marketing and, and, uh, customer development programs. And so, um, You know, we're not planning necessarily to do anything different with that cash. That's it. Thanks, Christian.

Great. No other questions. Thanks, guys.

Thank you. Thank you. If you would like to ask a question, please press star 1-1 on your telephone. One moment while we prepare for another question. Our next question will be coming from Robert of Blue Locust. Please go ahead.

Hi there. Hi there. Can you hear me? Yes. Yeah. Hey, Robert. Okay, great. Yeah, thanks. Thanks for taking my question. And yeah, congratulations on the good results. I just wanted to get some clarification on the percentage of U.S. parts in your different types of equipment. Would you be able to clarify that? Like, for example, what percentage of U.S. parts are in your wafer cleaning tools and in other tools? Thanks.

Yeah. And typically, I said between 5-10%. It depends on the cleaning tool type. And, you know, we do have some heater and some kind of pump, right? And those parts, you know, we're purchasing from the U.S. And so it's about a 5, 10% in terms of value-wise.

Okay, got it. And so do these parts need to get licenses or is that my understanding? Is that understanding correct?

Yeah, well, there's actually two categories, right? And that's the EPUC. Our tool is not ECCN list, which is meaning not ECCN yet, right? I mean, it's not ECCN. And also we're shipping mature nodes, customer, a facility. And for those portion of the tool, we do not need a PI license. Okay. The only tool you need a license is for advanced nodes and also some are tool within the ECCN number, which is like I say, carbon cobalt plating. and also some ARD tool. Those tool, if you're using the parts, you need license.

Got it. All right. So you're saying for the wiper cleaning tools, the parts, there's no license is necessary, even if they come from the US. So for example, your supplier doesn't need to get a license if they want to ship you the part. Is that correct? Yeah. About for mature, no, to make sure.

OK. Okay.

Hey, Robert and David, let me just clarify. So, I mean, there's a lot of regulatory and license requirements in general for tools going to China or going to other areas. And so the point is that this This new policy hasn't added any additional restrictions for cleaning tools and for certain tools. And so I just wanted to be clear. The new policy added additional restrictions for exports of products that would be going into tools that would be going to advanced nodes and for exports of products that would be going into this new platform.

Is that clear?

Answer your question, Robert?

Hello, Robert? Oh, it's gone.

I think we lost Robert. Yeah. It is gone.

If you would like to ask a question, please press star 1-1 on your telephone. We have another question coming in from Robert McKay of Blue Lotus. Go ahead.

Robert, answer the phone again.

Yeah, yeah.

Can you guys hear me now? Yeah, I lost connection there in the middle of the call. I'm sure someone else took notes. So I didn't catch it, but I'm sure someone else took notes. So I guess my next question then would be, what about the US headquarters? Does that complicate things for your business? Because I understand ASCM Research is headquartered in the US. Of course, you have the Chinese subsidiary. I was just wondering if there's any... any kind of negative impact from your specific kind of business overview. Thanks.

So you have the impact in the U.S.

or impact in China? I want to clear your question. Yeah, sure. So let me just clarify. So I just meant in terms of the BIS rules, I was just wondering if there's any kind of impact from the fact that your headquarters are in the U.S. Does that, let me think of how to phrase this. Does this make you subject to any extra kind of regulations in terms of the BIS rules due to your U.S. headquarters?

Okay, well, that's a good question. At this moment, U.S. headquarters basically is actually only conducting sales and marketing, right, and for their tool in the U.S. and Europe, right? And so for those activities that are promoting, you know, our tool made in China or maybe in Korea and to the USA or to the European market, I should say nothing impact there, right? This ever control law only for tools go to China, right? So I don't think impact anything outside of China activity.

Right. Okay. Got it. Got it. And then, so the other question was about your, your ECD tool. So, I understand it's only for the cobalt cleaning for ECD. And so the other tools that you ship that are ECD then, just like you were saying for wafer cleaning, there's no license requirements for those mature tools that are not for, for example, under 28 nanometer that are not for cobalt ECD. Is that correct?

That's correct.

Yes. Okay, great. Yeah, you are correct. Okay. And then for furnace, I think it also applies to furnace. Does that mean the furnace then going forward, there would be no revenue stream for furnace? Because I think from your remarks.

Well, actually, yeah. And like you said, definitely our furnace ARD is in that category, which is easily seen category. And for those two, probably we can either import any parts from the U.S., And second thing is that we can also have a U.S. person directly involved in the servicing, facilitation, or the shipment, whatever, all together. So that's the case with what devotes all our responsibility and sales, marketing, everything, decision to our Chinese team. And they have a CEO, they have a sales VP, operation people there. So they take care. So they can sell, but they have to be using non-USA pass. A U.S. person cannot be involved.

Got it. Okay. Uh, fair enough. And then, so, uh, for that furnace tool, then is there any, uh, Chinese or any Chinese suppliers that could, uh, uh, supply the parts that you need for that, for that tool to, to make it drastically, or would that be against the regulation?

Yeah, it's a good question. Actually, there's a path can be, you know, using, or where we're using maybe other, other country, you know, some parts we can see from Europe, right. And some parts from Korea and some are from Japan. We can fund some parts also in China too, right? But you need some kind of qualification to qualify those parts. That's where we take time.

Okay, got it. So in your view then, do you think that for the vast majority of your products, you can requalify with non-US supply chain parts and then theoretically maintain your product lineup?

I should say we're still evaluating that right now And we do see, you know, some possible can be changed quickly. And some parts we have the real working with the supplier, you know, then to qualify the parts and also work in the customer to qualify the, you know, that tool. Right. So with the effort, big time, and now they're just like, you know, one day switch. Right. But then normally our qualification process, I should say, if you're changing the parts and six months to one year, a typical time you need to qualify. That's the typical timing I consider qualifying new paths. Okay.

Got it. Okay. That's very, very helpful information. Yeah. Congratulations on the good results, and thanks for answering all the questions I had. I know it's difficult to sort through all these regulations. So, yeah, thank you. Thanks, Robert.

Thank you.

Thank you. If you have a question, please press star 1-1 on your telephone. One moment, please. Well, we have our next question. It's coming from . One minute for your line to open.

Do you hear me?

We can hear you.

Okay, great. Thank you, Mark. So my first question is regarding, I understand that for material 12-inch in logic side, the market side, market potential is very big in China. But I'm also very curious how about for, say, like, I mean, 96-layer NAND and 90 nanometer D-RAN. Do you expect the Chinese market I mean, FAB customers will continue to expand over the next few years. I think one of the arguments is that because for this non-adherent product, maybe because of the cost structure issue, so the market is very worried that these potential China FAB customers may not continue to have good expansion over the next one, two, three years.

Well, and obviously this is the moment we're still assessing their market, right? It's too early to give any conclusion right now. And if you say 99 or DRAM above, and there's a lot of niche market, right? In the DRAM business, you're not only, you know, getting into the smaller, you know, smaller dimension and some, you know, DRAM still sell 25 nano, but for all niche market there. So I don't know, you know, I just, I'm not, I cannot speak of a customer, but I want to see that DRAM does have a lot of applications in a large nodes, right? And for 3DNet, I don't know really in this moment, I cannot comment, you know, is there 96 layer, has any other application? We don't know yet really. And so I cannot comment.

Thank you, Debbie. Another question for me is that, so, Over the past few months, so after the Shanghai finish, kind of finish the lockdown, on the product development on the R&D side, I mean, what do you see that's kind of ahead of expectation in the past two quarters versus what's kind of, I mean, still slow in terms of the new product development? Another thing is that, could you share a little bit more about on the wafer cleaning side, our super critical JITO's progress? Thank you.

Okay, well, new product, and I think we are coming, you know, for almost like two or three years, you know, all the effort, right? There are two new products, new category product, which is a real double our address on the market. It's a real good progress, put it this way, right? We're in the final stage and they're testing and also do their, you know, I call it, you know, pretty much you want to make sure our testing is okay and meet the customer, you know, requirement and we ship. i still think we're probably possibly shipping by end of this year a new product for the customer and regarding the co2 dry clean product and i think we're we're doing also uh very well right this is a you know critical product and for other uh high spec ratio drying process and so our uh chinese engineer is working very hard and they try to bring this market you know to the market

Thank you. And Debbie, one more question is back to the gross margin side because I missed the first few minutes. I'm not sure if you or Mark already discussed the gross margin on ECP and furnace versus the corporate average because the second quarter gross margin is pretty good. I'm just thinking about is there any potential, is there any possibility that looking ahead, our gross margin will be more on the higher end of our long-term range? Thank you.

Well, I still want to say that our gross margin is still in the range of 40-45, right? And last quarter is again the combination tool, right? And you are right in our carbon plating for front-end application does have a higher margin, right? That's one of the driving. Also, we do have some combination of the Canadian tool to have also higher margin, right? So it really depends on the ratio and also the we do have something also in a low margin tool, like WLP tool, right? And also, you know, auto bench tool, right? So it's really dependent on combination. So I still say our margin is still 40, 45%, you know, and for the near future.

Okay. Got it. Thank you. Thank you, David.

Thank you.

One moment while we prepare for the next question. If you would like to ask a question, please press star 11 on your telephone. The next question will be coming from Charlie Chan of Morgan Stanley. Your line is open.

Thank you. Hi, David. Hi, Mark. Hi, Charlie. First of all, thanks for walking us through. Yes, these are very challenging environments, and thanks for all the clarifications. So my first question is really about the cyclical impact. I know China still needs to build to local sufficiency, right? But if you look at outside of China, essentially all the foundry fabs, memory fabs are cutting KPAX by at least 20% into next year. Do you think that's going to impact your plant in mature nodes? And do you see any matured nodes customers are withdrawing some KBEDS plan recently? Thank you.

Yeah, actually, Charlie, I really couldn't say in a real near future, right? When I say next quarter, two quarter, I can't really tell. But I just, you know, in a high-level point of view, as I said, you know, China is still consumption a lot of mature nodes and products, right? And there are also recent electrical car even consume more of the power device. So a lot of a mature note product, which is a steel now they're enough or made in China. Right. And so as that, for that point of view and China's been real increase more of a mature note production and then meet their own requirements. So from that point of view, I can see that the next few year is still out of a, FAB is going to build to meet such a requirement because most of the market right now is in China. That's the real reason markets are here. So they can build their FAB, they can sell their product. So from that point of view, I still have a very positive view for China market building mature nodes. As a matter of either the next one quarter, two quarter, or three quarter, I couldn't tell. I have the real problem. of the market next year. But from the long view, I think there's a lot of reflux that's going to build up. Also, it's an electrical car driving, right? It's a real high, you know, developed in China. That's a power device, can be another bigger potential market we're looking at right now.

I see. Yeah, I totally respect your view. But just FYI, we did have some analysis before, right, meaning CapEx long-term still correlates with the free cash flow. So from what we're seeing right now, there's some wafer pricing pressure in mature notes. So I'm a little bit worried about free cash flow could decline and that at some point will catch up the CapEx plan. But anyway, I do agree that long-term, there is still upside for China's mature notes. And my second question is about your efforts or the entire supply chain's efforts to minimize the U.S. technology dependency. So you said that you want to qualify some U.S. components on Japan, Germany, or even China locally. I think that that that should be the way to do. But my question here is that how do you or a customer complete the production line without the critical tools, right? No matter ASML's lithography tool or applied materials AP tool or, you know, land research ICP, et cetera, right? Because those companies or countries still want to more comply with the U.S. rule, how do you still sell your tools if your customers, they go for those critical products?

Okay, let me clear that.

Do I miss anything? Yeah.

Well, let me clarify that. You mentioned for the advanced nodes or for mature nodes?

uh advanced notes because the mature notes i i think i think uh should be fine right no matter from the the uh uh export rule perspective or or technology perspective but mature advanced noise is something that i i am i am asking yeah i i think we we do is anticipate the mature nodes or slow down right you know a lot of

Like you said, the critical parts and also critical tool, right? It's made in the U.S. right now. And so those systems is hard to really easily find another, you know, replacement tool, right? In other, even in Japan or in Europe. And so that can be their slowdown. Yeah, I agree with that. So for I see that is really, you know, we're more focused on the mature nodes. And at the same time, we're also focused on the international market with advanced nodes too, right? And like HCM has differential product, we're not only trying to sell the 60nano, 40nano, we want to also sell to the 3nano, 2nano, right? So we're going to also focus in the market in outside China for the advanced nodes, and this way we can have a differential product and get into the global market.

I see. That's very, very reasonable. So last question, maybe to Mark, or Debbie, if you want to comment. Because right now all the local equipment says they are kind of more focused on the maternal opportunity, do you see more price competition from your local peers? And secondly, Mark, given the kind of reduced revenue scale, but I believe you guys continue to spend R&D What would be the reasonable operating margin assumption for coming years? Thank you.

Okay, let me answer the first question. I leave the question for the second for Mark for answer. Okay, well, and you mentioned mature nodes. I think ACM real position for that mature node. They give even cleaning, right? And we now can do mature nodes cleaning almost 90% or above. Also, we're launching almost two years ago, AutoBench product. So for this moment, I think we're very well positioned for those mature nodes. Plus, we do have LPCVD, those kind of tools come out. And copper plating, obviously, needed for mature nodes. And also, we do have two new products, which also have a huge marketer contribution or marketer potential for the mature nodes. So the, in terms of a local competitor, um, I will also this way, uh, customers still choosing, you know, and not only say low price and, you know, even looking at mature nodes, uh, there's also two are difficult to make. And also for the customer who want to rent in faster for their machine or the production, they got to have, or, you know, from the pot or the tool that can use the first right now to qualify, you know, one vendor after another. So I still think that this semiconductor is not easy, you know, and for any, any tool player customer, probably like a one or two, two player, maybe maximum three, you know, maybe two is good enough for them to choose. If I've got a three, four different player and for the same product, it's really focusing there on the Afro. They make it, they make it a chip, right? So, so we're, we're pretty comfortable on our position, our technology and that's, and also our customer relationship and also our commitment. right also you know multi 10 20 almost 10 50 year relation with the customer so we're pretty okay with the compatible position in china hey mark maybe a second question for you well yeah you bet i think the question was about the operating margin kind of outlook so yeah as you know

We've talked about this before, but look, we're a technology company. We believe there's a lot of growth ahead of us. We certainly are still targeting that billion-dollar revenue target over the longer, medium, longer term. So we're planning for growth. For next year, of course, David mentioned, you know, we'll – We're not guiding it for next year. We'll talk about that on our Q4 call. But we're planning for growth. And in general, the operating margin, it depends on the overall top line. And so we just did 25% here in Q3. Depending on what kind of revenue you'd be looking at for next year, we'd like to have kind of a floor of a 10% annual. level so you know with with modest growth next year um that would be kind of a a reasonable target um and uh you know if any with good growth we hopefully would see some leverage so mark uh uh you know i'm not sure if you uh you i get it right so we said some moderate growth you're still comfortable you can get 10 of rating margins

or both next year. Is that right?

I'd call that a target. Yeah, we'd call that a target. I mean, it depends. There's a lot of factors. You know, we're going to invest in a given year. But, you know, we generally have kind of a 10% annual operating margin target.

Okay. Okay. Fair enough. Thanks for all the answers, David and Mark.

Okay. Thank you, Charlie.

One moment while we prepare for our next question. Our next question will be coming from Mark Miller of Benchmark Company. Your line is open. Your line is open.

Hey, Mark.

Okay, there was a glitch on the phone. I just had a question. You adjusted your year-end total sales down somewhat. I was just wondering, and you attributed that to several factors. I was wondering what percent of that change was attributed to the new restrictions.

Okay, well, I should say there's a... You know, probably I should say there's a path, right? Where, and those parties are, you know, we're buying us parts, right? And so that's, what would be now the shape with the people, uh, or you have the founder, uh, different, uh, uh, I call their source by compliance. That's the portion of, uh, uh, delay our shipment, right? That's something push off. And also we still do have some constraints, even from non-USA parts, right? It's really. you know, tight control for the constraint of the supply chain. So that's all maybe put the two things together. That's impact our revenue in the Q4.

Okay, you indicated the restrictions would impact your ECP plating tool. Did you also say furnaces?

Furnaces will be, you know, specific and special for ARD, right? It's really dependent on type, right? So it's not all furnaces.

Okay, some furnaces. And just one final housekeeping question. What was stock-based compensation?

What was the question, Mark?

What was the stock-based compensation?

Stock-based comp, it's $1.9 million for the quarter.

Okay, thank you. Thank you, Mark.

Thanks, Mark.

If you have a question, please press star 11 on your telephone. One moment, please. There are no more questions in the queue. I would like to turn the call back over to David Wang for closing remarks.

Okay. Thank you, operator, and thank you all for participating on today's call and for your support.

Great. Thanks, guys.

This concludes today's conference call. Thank you all for joining, and have a good rest of your day. You may all disconnect.