ACM Research, Inc.

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

Good day, everyone. Thank you for joining us to discuss third quarter 2024 results, which we released before the U.S. market opened today. The release is available on our website as well as from Newswire Services. There's also a supplemental deck, slide deck, posted in the investor section 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 Fung, 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 opinion only as of the date of this call. ACM is not obliged to update you on any revisions to these forward-looking statements. Certain of the financial results that we provide on this call will be on a non-GAAP basis, which excludes stock-based compensation and an unrealized gain loss in short-term investments. For our GAAP results and reconciliations between GAAP and non-GAAP amounts, you should refer to our earnings release, which is posted on the IR section of our website and on slide 13. And refer to slide 13. Let me now turn the call over to David Wong, who will begin with slide three.

David. Thanks, Gary. Hello, everyone. And welcome to ACM Research Third Quarter 2024 Earnings Conference Call. Please turn to slide three. For the third quarter, revenue was $204 million, upper 21%. Assumments were $261 million, upper 23%. Profitability was good, with a gross margin of 51.6% and operating margin of 27.5%. And we ended the quarter with approximately $369 million of cash and time deposit, with a positive cash flow from operations for the quarter. Revenue for the first nine months of the year was $558.6 million, upper 44%. Year-to-date shipments were $709.7 million, upper 56%. We believe this growth is significant, demonstrate market share gain for ACM and their contribution from new product cycle. Now I will provide the detail on product. Please turn to slide four. Revenue from single-wafer cleaning, Tahoe, and the semi-critical cleaning product grew 22% in Q3 and represented 79% of total revenue. ACM offers a comprehensive top-to-bottom cleaning portfolio. We estimate the global total available market, or TAN, for the cleaning is close to $6 billion, and ACM products support more than 90% of all cleaning process steps. in both memory and logical manufacturing. Our factor in the figure proxy mixing, or SPM, have led to increased competence toward our target for continued market share gain in cleaning. As a reminder, we estimate SPM process represent about 25% of total front end cleaning market, but so far it has been a small contributor to our business. During prior report, we announced a technical progress in our high-temperature SPM solution. Recall that only one other major Canadian pool supplier services the high-temperature market for SPM. During our first quarter call, I reported a technical breakthrough that could enable us to be the second player. We are now in later stage evaluation and a number of key customers, and we are committed to become the second supplier in the world supporting commercial high temperature SPM cleaning. That's not all. Today we issue a press release marking a major performance breakthrough for Tahoe, ACM's environment solution for the middle and low temperature SPM segment. The Ultra-C Tahoe now achieves the performance of a standalone single wafer cleaning tool on low to high temperature SPM process. The Tahoe platform's advanced cleaning capabilities have achieved an average particle count of less than 6 particles at 26 nanosites, meeting the strategic requirements for advanced node manufacturing. The tool is also capable of removing 1x nanoparticles for the most advanced logic memory applications. with additional of a smaller particle filtering system. Tahoe's patented hybrid architecture is among the first in the industry to combine batch wafer process and a single wafer cleaning chamber into the same SCM tool. The hybrid architecture delivers enhanced cleaning performance, high throughput, and process flexibility with up to 75% reduction in chemical consumption. ACM estimates cost savings of up to $500,000 per year from fabric assets alone, with the additional environment and the cost benefit from reduced fabric assets and treatment and disposal. With the rise of AI to the forefront of the consumer mind, we expect to increase public attention on the environmental impact of semiconductor chip manufacturing. We believe ACM Ultra OC Tahoe is well positioned to help customer increase production of advanced AI chips but with reduced footprint on the environment. Put another way, Tahoe is good for customer and good for planet. We believe Ultra OC Tahoe is another example of excellency from ACM innovation and world-class R&D team and demonstrate how innovation can achieve the information, economy, and protect the environment. We also announced today that the UpGrid Ultra-C Tahoe is now in mass production at several high-volume customer facilities in China, and under evaluation at additional logic and memory customers. We expect to deliver more units by end of year. The market opportunity for Tahoe is quite large, as the middle and low temperature is more than 80% of their SPM market, and thus about 20% of their overall cleaning total towards the market. We believe ACM's cleaning portfolio, including SAP's Tebow, Tahoe, Semicritical, together with SPM and Supercritical CO2 drying, puts ACM in world-class status. We see good opportunity for continual market share gain in mainland China, and we are confident we have what it takes to scare major customer in international markets. Revenue from ECP, furnace, and other technology grew 36% in Q3 and represented 17% of total revenue. Momentum for our plating tool remained solid for both front-end and back-end tools. I'm pleased with the revenue performance. I also noted that shipment for the ECP furnace category grew by 67% year-to-date. Our furnace product cycle is also gaining traction with other memory and logic customers. Overall, we now anticipate having 17 furnace customers by the end of this year, upper from the nine at the end of last year. We expect a contribution to revenue from furnace to accelerate in 2025. Revenue from advanced packaging. which is crude ECP, but includes service and a spell, declined by 21% for Q3, and was up 3% year-to-date, and represented 4% of revenue. This category includes a range of packaging tools, including coder, developer, scrubber, PR sweeper, and web adders, and also service and spell paths. and we are exploring new products and technologies to participate in the next generation of advanced packaging. We believe ACM is one of the only companies that offers a full set of wet tools, cover plating tools, and polish tools for advanced packaging. Year-to-date, growth of advanced packaging was low. We attribute this to slower growth for China-based packaging firms who are more exposed to broader-end market trends. We also know this category does not include our ECB tool for the advanced packaging. In early September, we announced purchasing orders for four wafer-level packaging tools from U.S. customers and U.S. R&D centers. These tools are scheduled for delivery in the first half of 2025. about our fan-out panel-level packaging tools. We have recently announced three panel-level packaging tools, including Vacuum Flask Clean tool for chiplet, the Horizontal Plating tool, and the Bevel Edge tool. These three new panel tools make a strong offer by ACM to address the advanced panel-level packaging market. We have been developing this technology for years, and I believe the market is now coming to us. Our technology is applicable to micro-order pitch, high-density packaging. This is especially relevant to AI packaging of a GPU at a high-density, high-bandwidth memory HBM. We see a large global opportunity as several major American leaders have chosen Pano for their AI chip packaging solution. Finish up on the product. We are making good progress with our TRAC and the PCVD platforms. Both of these products have innovation and differentiated platform design and allow for process flexibility and high throughput. We have a solid list of ongoing demonstrations and evaluations for both TRAC and PCVD. Further progress for both PCB and the track over the next year with the revenue likely later 2025 and more and more contribution in 2026 and beyond. Moving on to the customer, please turn to slide 7. In Q3, we saw broader demand for foundry logic, power, and memory. We had a full 10% customer for the period. We present 63% of the revenues. In China, we have a leading position in cleaning and target additional market share gains. We believe we have become a world-class multi-product company with a competitive product in the market for plating and we have a solid evaluation pipeline for tracking PCB. In the U.S., we continue to make steady progress. I already mentioned the order for four WIP tools scheduled for delivery in 2025. In addition, activity with our major U.S. customers continues to progress. Both of our SAP tools have already achieved supplier qualification, and we have moved to the production qualification process. And the backside of the Bible Edge tool, and we did major in this year, is in the later stage of the supplier qualification. In Europe, We are also in a later stage of qualification of R2C Step 5 Canadian Tool, which we delivered to a major global semiconductor manufacturer in Q3 of 2023. In Korea, we remain engaged with the customer for a range of tools. To support the growth, we made progress on our facility expansion in China and other regions. Please turn to slide 8. On October 20th, our subsidiary ACM Shanghai hosts the opening ceremony for the Lingang Production and Army Center that is gathering employees, customers, suppliers, and local officials. The first of two modern manufacturing floors including state of art automation system and has been initial operation. During the third quarter, we also moved into the new ACM Shanghai headquarters The facility is also in the Shanghai high-tech Zhangjiang Science Park and offers a great work environment for our engineering team. In the U.S., on October 1st, we completed the purchasing of our new Oregon facility, which includes 5,200 square feet cleaning room. We plan to move in early next year. We plan to deliver several tools in 2025 to provide the easy access to major customers for advanced tools evaluation. ACM is building a strong footprint in the U.S., including our own clean room, our new lab, and the growing service team. We see this as a great opportunity to participate in the market growth of U.S. semiconductors. I will now provide our outlook. Listen to slide 10. We have reached our 2024 revenue outlook to be in the range of $725 to $745 million versus prior range of $695 to $735 million. In the middle point, our revised outlook represents 32% year-over-year growth compared to 28% previously. Shimmer activity remains strong, and we continue to expect a full-year shimmer growth rate to outpace the revenue growth rate. Our visibility for the remainder of the year is largely driven by our current order book and the qualification and the customer acceptance of previously shipped evaluation tools to a range of customers. From our perspective, we believe WFE spending in mainland China will remain at a high level as the country continues on its goal to match the production capacity with under-market consumption. We continue to focus on market share gain, new product, and increase the localization to drive our growing objective in China market. Further, we are expanding our business to new customers in the U.S., Korea, Taiwan, Europe, and other Asian markets. Our long-term target is to generate half of our revenue from outside of China. Now let me turn the call over to our CFO Mark. who will reveal the details of our third quarter results. Mark.

Thank you, David. Good day, everyone. Please turn to slide 11. Unless I note otherwise, I refer to non-GAAP financial measures which exclude stock-based compensation and unrealized gain loss on short-term investments. Reconciliation of these non-GAAP measures to comparable GAAP measures is included in our earnings release. Also, unless otherwise noted, the following figures refer to the third quarter of 2024 comparisons or with the third quarter of 2023. I'll now provide financial highlights. Revenue was $204.0 million, up 21%. Revenue for single-way for cleaning, Tahoe, and semi-critical cleaning was $161.0 million, up 21.6%. Revenue for ECP, front-end packaging, furnace, and other technologies was $34.6 million, up 35.6%. Revenue for advanced packaging, excluding ECP services and spares, was $8.4 million for the third quarter, down 21.0%, but for the first nine months of the year, it grew by 2.9%. Total shipments for the quarter were $261 million, up 23%. Gross margin was 51.6% versus 52.9%. This exceeded our long-term gross margin target of 40% to 45%. For the full year, we expect our gross margins above the high end of the range. This is due to year-to-date gross margins of about 50% and our expectation for gross margin in the upper end of our 40% to 45% target range for Q4. We continue to expect gross margin to vary from period to period due to a variety of factors such as sales volume, product mix, and currency impacts. Operating expenses were $49.2 million up from $45.3 million. R&D was $24.5 million versus $22.7 million. Sales and marketing was $13.2 million versus $14.3 million. And G&A was $11.6 million versus $8.4 million. For 2024, the full year, we plan for R&D in the 12% to 13% range, sales and marketing in the 7% to 8% range, and G&A in the 5% to 6% range. Operating income was $56.1 million versus $43.8 million. Operating margin was 27.5% versus 26.0%. Realized gain from the sale of short-term investments was $0.2 million versus $0.7 million. Recall that unrealized gain is not included in non-GAAP earnings. Income tax expense was $4 million. versus 0.7 million for the full year we now plan for an effective tax rate on non-gap pre-tax income in the 12 to 14 percent range net income attributable to acm research was 42.4 million versus 37.6 million net income for diluted share was 63 cents versus 57 cents our non-gap net including Our non-GAAP net income excluded $11.9 million, or $0.18 per share, in stock-based compensation expense. Stock-based compensation expense declined sequentially in Q3, and due to the accelerated amortization for the ACM Shanghai stock option grants, we expect SBC to decline again in the fourth quarter. I will now review selected balance sheet and cash flow items. Cash, cash equivalents, restricted cash, and Time deposits ended the third quarter at $369.1 million versus $366.8 million at the end of last quarter. Inventory net was $628.7 million versus $602.9 million at the end of last quarter. This included raw materials and work in process of $329.8 million and finished goods inventory of $298.9 million. Finished goods inventory mainly includes first tools under evaluation that are customers, It also includes finished goods at ACM's facilities. Cash flow from operations was 11.9 million for the third quarter and 63.9 million for the first nine months of the year. Capital expenditures were 33.4 million for the third quarter, 73 million for the first nine months of the year. For the full year 2024, we expect to spend about 100 million in capital expenditures. That concludes our prepared remarks. Let's open the call for any questions that you may have. Operator, please go ahead.

Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Charles Shih, Needham & Company. Your line is now open.

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

Okay, Charles, very good question. Well, actually, as I said, our typical process cleaning will cover almost 90%. And this moment, I want to say, is the only single wafer phosphoric asset we have not put in the market yet. So basically, the rest of the tool, and we are either in R&D with the customer, also we're going to put it in production, right? And even, you know, including all this phosphoric action for the via, and also high temperature of their SPM process. and most of the other TMA process. So we're pretty fully engaged regarding this 3D NAND web process. I call it the community.

Got it. So basically there's still some gaps, but you're engaged. This comment would apply to 3D NAND as well.

Yeah, I should say probably by end of this year, we should be qualified all the process and including we already put in production existing process, right? So we're made a lot of progress.

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

Okay, let's come to the first question, right? I should say last four years, you can see the China WFP market growing quite a bit. you know, steadily, right? And I would say probably the next few years, we still have a strong demand, you know, in China market. Why? There's still a lot of memory and also logic or foundry, IGBT market, you know, still, there's still the building process for the fab. So real come to the next year and it's hard to real give you, you know, number. We're thinking about something like that and it might be a little bit low, might be a little bit up, It's really hard to predict at this moment. But I want to say that they're strong still. And next few years, the building process is to keep going. We're looking at all other foundry business. Their upper time, their utilization of the line is pretty heavy. So I want to say we're still kind of positive about growing in the China market. Second question.

Yeah.

Any questions for the first one before I answer your second question?

Yeah, please. Please continue. Okay.

I mean, there's only one day, right? I mean, it's hard to predict. You know, I mean, we're really, you know, whatever, we have to follow the rule of all the countries, all the regulations come out new or changing. And basically, we're going to, you know, really just support all production, ramping up a key customer, you know, in the global.

Thanks, David.

Thank you.

Thank you.

Our next question comes from the line of Bart Miller of the Benchmark Company. Your line is now open.

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

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

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

David, do you want to take that or do you want me to hit on that?

I mean, I can add on that.

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

Yeah, well, actually, we do see some customers who are obviously interested in our cleaning and also a couple of cleaning tools. And we see that a big potential, especially our Saps and Megasonic and also this Tahoe tool, right, which can save us a big asset up to 75%. So we see a lot of opportunity for our differential products to get into the global market. So we're expecting our differential products will be more in a state of accelerating, getting to their custom outside China. Thank you.

I would add, Mark, the activity is good. I know we're all looking for orders, but we're getting, you know, with our, we've got a pretty good sized team, US, Europe, other areas. Um, and so we're, we're pretty heavily engaged, uh, with, you know, a lot, you know, a number of other customers that we haven't spoken about here.

All right.

Thank you. Thank you.

As a reminder, to ask a question, you'll need to press star one, one. Our next question comes from the line of Suji Da Silva of Roth Capital. Your line is now open.

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

Yeah, it's hard to, you know, give you that precisely right now. And obviously we see the opportunity in the U.S. as we have a full advanced packaging tool. We got it this year. We're shipping, you know, first up next year. We continue to see that opportunity. And also we see there are, you know, and we already have a free tool in one of the key logic customer, you know, their evaluation of the product, you know, on a different process step. And also we see other interest in the body in the, you know, actually in Asia. So we're engaged, you know, with those customers. And next year we see that CapEx continue, you know, kind of going on and with their, you know, projection or their plan. So we're really excited and engaging with those, you know, big guy and also outside China. really try to penetrate our differential product in the production line. As I said, a lot of our tools will offer the market and get a yielding pool and also get a big asset saving, at the same time providing excellent during the particle removing performance. So we'll see that our differential product get X-rated for the market.

Okay. And then, um, on the high temperature SPM solutions, it sounds like you have technical advantage there. What are the specific specs that you can come in to compete with the incumbent there? Is it throughput or, uh, you know, the less, less, uh, more efficient, any color there'd be helpful.

Yeah, well, actually, let me put this way. Uh, our SPM product, I have two, right? The one is the high temperature. SDM single waiver tool, which is a handle, you know, 170 degree higher sulfuric acid, right? And then this tool actually, we did a breakthrough, as I mentioned before. We can much control our chemical splash outside chamber. So therefore, we have a better cleaning environment. And with our cleaning chamber, we don't need much time spending on cleaning the chamber itself. So that will give you upper time better, right? And also, you know, give the good particle performance. Second one is real Tahoe tool, right? They're actually targeting lower and middle level temperature of SPM. And this has been our flagship tool and they're, you know, combined batch and single. And the real perform breakthrough this year is we have excellent particle removal efficiency, right? As I said, 26 nanoparticles adding about six particles only. So that's definitely equivalent to the single wafer process capability. So with the continuum, as I said, improving the filtering system, and this tool can be further used into the removing 1x nanoparticle, which is really demand for all the valence nodes, memory and DRAM, and also logic. So we see that they're both tools and working in the market. in China, also outside China. As everybody, you know, so big asset process, they're actually, you know, very happy about their, you know, with treatment, right? Also handle their, this material in the fab environment. So that's really what giving good performance and also environment, you know, I call it protection, saving for all the fab in the world. So we see that there are bigger opportunities for our top of the world. Okay.

Thank you, David. Thanks.

Thank you.

Thank you. Our next question comes from the line of Edison Lee of Jefferies. Your line is now open.

Hi, David and Mark. Congrats on the great results in 3Q. I just have a quick question because you did mention that the advanced packaging market in China is slowing down. And I think maybe you can actually help us understand whether that should be a leading indicator for front-end spending in China, whether we should be worried about front-end spending in China as a result of the slowdown in advanced packaging in China. So, yeah, how should we think about it?

Yeah, well, I want to say that is really looking last year, right, and also in the first half this year, It's kind of a slow. However, we see that it gradually pick up, right, in Q3, Q4. And we do have other orders coming. So, you know, you look in other markets, you know, in the foundry business, they pick up. I think from now on, they're gradually pick up on their, you know, this advanced packaging, you know, WFU spending. So we are positive, you know, I should say Q4 and the next year. But I'm talking about past, right? Our revenue is really represented last, you know, four months and last year, you know, all the tour was shipping. So that's our view about this advanced packaging status.

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

Well, I mean, obviously there's a, you know, quite different company, right? And they're, there's a certain company, you know, moving to this, you know, high density packaging. And obviously also we see the company also moving the panel too. So it's a lot of people and work on this advanced packaging, you know, um, I call it the technology and also their positive development.

Okay, that's great.

Thanks, Harrison.

Thank you. As a reminder, to ask a question, you will need to press star 1-1. One moment, please. Thank you. Seeing no more questions in the queue, let me turn the call back to David Wang for closing remarks.

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

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