ACM Research, Inc. Q2 FY2020 Earnings Call

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the ACM Research Second Quarter 2020 Earnings Conference Call. 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 Dvorchak, Managing Director of The Blueshirt Group. Mr. Dvorchak, please go ahead. Thank you.

Good morning, everyone. Thank you for joining us on today's call to discuss second quarter 2020 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 will reference during our prepared remarks. On the call with me today are our CEO, Dr. David Wang; our CFO, Mark McKechnie; and Lisa Feng, the CFO of our operating subsidiary, ACM Shanghai. Before we continue, please turn to Slide 2. Let me remind you that remarks made during this call may include predictions, estimates or other forward-looking information; other information 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. Also, certain financial results that we provide on this call will be on a non-GAAP basis, which excludes stock-based compensation as well as losses relating to a change in fair value of a financial liability. 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 David Wang, who will begin with Slide 3. David?

Thanks, Gary, and welcome, everyone, to today's call. Before we discuss our second-quarter results, I want to briefly comment on the COVID-19 situation, which continues to impact families, businesses, and markets. I would like to recognize the great effort of our ACM team as we have adopted a new working environment and redesigned our workflow. Since our last quarterly report, we have seen a full return to normal activities in our Asia operations, with nearly all their restrictions within Mainland China and Taiwan and Korea now lifted. Travel in and out of China is still restricted, but we have been able to work around to mitigate any potential impact to our business as of yet. With that, we had another very busy and productive quarter with good financial results, new product activity, and solid progress on our strategic initiatives. We are pleased with our financial performance. We delivered revenue of $39 million, up 35% year-over-year. Revenue in the quarter was evenly split between our 3D NAND customers and our 2 foundry customers. Shipments were $45 million, up 36% year-over-year and a strong rebound from the pause in Q1. We delivered a good balance of growing versus profitability, with almost a 50% gross margin and 21% operating margin. We remain committed to delivering profitable growth as we continue to invest in R&D for new products and global sales and marketing. We ended the quarter with $86 million of cash. This includes $59 million of PE funds received by ACM Shanghai in connection with its listing on the Shanghai Stock Exchange, which we released from voluntarily restricted cash. The quarter-end amount was net of $50 million of income payments for the purchasing of the CPE land right to build our new facilities and employee dormitories and $40 million investment in SMIC's stock market IPO. I will now discuss recent operation highlights and customer activities. Tahoe continues to gain traction in the market. In Q2, we delivered our second Tahoe tool to our lead customers and recognized revenue upon shipments in the quarter. During the remainder of 2020, we expect to deliver another Tahoe tool to a lead customer and to deliver demo tools to several other customers for evaluation. We are also seeing good momentum with our ECP map program. The ECP map is a front-end copper plating tool equipped with ACM's proprietary technology to deliver better pad performance. I'm happy to report today that in the second quarter, we achieved acceptance and recognized revenue for our first ECP map front-end tool. And in July, we delivered additional demo tools to another leading China-based foundry. At Santo China in June, we introduced our Ultra C SAPS-VI tool, which is the latest addition to our Ultra C SAPS cleaning product family. The SAPS-VI supports the increased sales demand of our DRAM and 3D NAND flash customers. The SAPS-VI features 18 chambers versus 12 chambers for SAPS-V but comes with the same tool widths and slightly increased lengths to allow for plug-and-play integration into existing production lines. I'm excited to report that we received a conditional purchase order for our SAPS-VI first tool to support production ramping at a key memory customer. We expect to ship the tool in the third quarter. We remain focused on our goal to expand beyond our current base of major customers. Yesterday, we issued 2 press releases that evidence our significant progress in our business development efforts. First, we announced a total of $36 million of purchase orders and participating in the final stage of bidding process with 2 new China-based customers that manufacture analog and power IC devices. Analog and power IC devices are growing markets in China, with rapid growth drivers including 5G, electric vehicles, etc. ACM will supply a range of our newly introduced semi-critical tools, including our scrubber, backside wafer etching tool, auto wet bench, our SAPS-II cleaning tool, and our copper interconnect ECP map tool. We expect to ship most of those tools in the second half of 2020, with acceptance and revenue more likely in 2021. These customers chose ACM due to our technology leadership and our R&D and production capability in China. We believe the proximity of these customers to our new Lingang facility can lead to strong long-term collaborations for future business opportunities. Second, we announced delivery of our SAPS-II tool for R&D to the U.S. demo lab of a leading global semi-cap equipment OEM. This is an exciting development and a major milestone for ACM, as it marks the first delivery and installation of ACM's Smart Megasonix technology in the U.S. Our SAPS technology is being evaluated for its ability to complement this OEM's tools. It is to enable the OEM to deliver better performance with their own customers and on more advanced nodes. We have begun installation of the SAPS-II tool in the lab with the support from our U.S. and international service team. We view this installation as a major development for ACM as we extend our market reach from Asia to North America. As we have said in previous calls, we are working closely with one potential customer in North America, and we believe every major semiconductor manufacturer can benefit from our technology. Now let's turn to Slide 5. This represents ACM's view of market opportunity addressed by our four product lines. Our available market starting with our core single-wafer cleaning product, SAPS, TEBO, and Tahoe and our semi-critical cleaning products. We estimate that these tools altogether address about 80% of the $3 billion wafer cleaning market for $2.4 billion market served by ACM cleaning products. We estimate that our other newest products can add a $2.6 billion opportunity with $1.6 billion from the vertical furnace and about $5 million each from ECP and SFP products. ACM is focused on gaining market share by expanding our product line and winning additional new customers. Our current road map extends many years into the future, with a strong commitment to expanding our market opportunity with new products. Now I'll update you on several major strategic efforts for 2020. Please turn to Slide 6 for discussion of our production capacity. In early May, we finalized an agreement to acquire land rights in the Lingang region of Shanghai, 30 miles from ACM Shanghai headquarters. This will be the future site of our fully funded R&D and production facility as shown on Slide 7. We had a groundbreaking ceremony on July 7 to mark the start of construction for the facilities. The new 1 million-plus square feet of R&D and production facilities will incorporate steel art, metrology tools and ACM's own family of process tools for R&D and custom demos. It also includes leading-edge manufacturing systems equipped with advanced operational technology. Importantly, we will boost our production capacity by 5x versus the current level. We expect to begin initial production in late 2022. Now a brief update on ACM Shanghai stock market listing. We submitted ACM Shanghai IPO application in late May. The application is now in a comment period with the Shanghai Stock Exchange. If all goes to plan, we continue to expect pricing IPO by year-end. Finally, I would like to discuss our investment in connection with SMIC's IPO. We invested RMB 100 million or USD 14.2 million to participate in a partnership to purchase shares of SMIC. The partnership used all of the funds it risked, net of expenses, to purchase shares of SMIC at an IPO price of RMB 27.46 per share. SMIC's shares started trading on the stock market on July 16 and raised more than USD 6.6 billion. We congratulate SMIC on their stock market listing and offering. On August 4, SMIC announced a collaboration framework agreement with the Beijing Economic-Technological Development Area. For Phase 1, they will invest $7.6 billion to build a 28-nanometer and above node fab with the capacity of 100,000 wafers per month. We are honored to be a valued supplier to SMIC, and we are working closely with both their 4D nano and 28-nano teams and participating in their fab expansion in Shanghai and Beijing. We expect SMIC to become one of the top 3 customers in the near future. Before I turn it over to Mark, I would like to discuss our 2020 outlook. Please now turn to Slide 8. Looking forward, we are excited by our business opportunities and remain optimistic about our future. Let me share our current outlook. Since the first quarter, we have received improved indications for the remainder of the year. We have a strong Q3, good visibility through Q4, and orders now built into the first quarter of 2021. Our visibility is supported by firm orders, customer forecasts, and tools awaiting acceptance. Accordingly, we have updated our full-year 2020 outlook. We expect revenue to be between $140 million and $155 million, up from the previous range of $130 million to $150 million. The revised revenue range represents 37% annual growth at the mid-point. Our outlook is based on several key assumptions. First, the COVID-19 situation further improves in China and stabilizes in the rest of the world. Second, Chinese semiconductor industry fab investment continues. Third, the revenue range assumes good growth from foundry and NAND customers and muted DRAM recovery. We believe our updated guidance reflects that we are successfully executing our strategy. We are investing in R&D to enhance our current product line and to develop new products. We are building global sales and marketing resources to penetrate new customers in new regions. We are balancing near-term profitability to invest in new products to increase our total market opportunity, and we are scaling production capacity to support our long-term growth plan. To conclude, I would like to thank all our employees for their hard work and dedication. I also want to thank our customers, partners, and the shareholders for their continued support and confidence in ACM Research. I will now turn the call over to Mark, who will discuss financial results in more detail.

Thank you, David, and good day, everyone. We had strong financial results in the second quarter. Unless I note otherwise, I will refer to non-GAAP financial measures, which exclude stock-based compensation and a new line item change in fair value of financial liability, which I'll describe shortly. Reconciliation of these non-GAAP measures to comparable GAAP measures is included in our earnings release. Turn to Slide 9. For the second quarter, revenue was $39 million, up 35%. Growth was driven by solid demand for our front-end equipment and back-end tools. As David noted, we had a balanced revenue contribution from our 3D NAND customers and our 2 logic customers. Total shipments were $45 million versus $33 million in the year-ago quarter and $12 million last quarter. This includes deliveries for which revenue was recognized in the quarter as well as deliveries of systems awaiting customer acceptance for potential revenue in future quarters. Gross margin was 49.7% versus 45.4% in the prior year period. Gross margin was above our long-term target of 40% to 45%. Gross margin varies on a quarterly basis due to a variety of factors, such as sales volume and product mix. Operating expenses were $11.2 million, up 42%. The increase in operating expenses was related to higher R&D on new products and increased sales-related activities, including additional activities in the U.S. market. Operating income was $8.2 million versus $5.3 million in the year-ago period. Operating margin was 21% versus 18.2% in the prior year period. Now I want to provide some detail below the operating line. Our GAAP results included a loss of $5.4 million described as a change in fair value of financial liability. I want to be clear, this was a non-operating, noncash accounting entry that is excluded from our non-GAAP results. It resulted from an agreement that was required for the STAR Market IPO. Let me provide some more context around this item. In 2016, before the U.S. IPO, ACM issued a warrant to a private equity investor called SMC. After ACM's U.S. IPO in 2018, SMC exercised the warrant and received Class A common stock. In order to comply with the STAR Market IPO, PRC regulations required SMC to surrender those shares first then get PRC approval, after which ACM would deliver the shares back to SMC. For this reason, on April 30, ACM entered an agreement which canceled these shares and provided SMC with several alternatives, including a warrant for the same number of shares. This obligation is treated as a liability on ACM's books until a specific alternative is selected. ACM's stock moved up $22.43 from April 30 to quarter-end, which caused a $5.4 million non-operating, noncash book loss in our Q2 GAAP results as it was marked-to-market. This liability was terminated on July 28 when SMC selected the warrant alternative and entered an agreement in which ACM issued a warrant. The history of the SMC investment has been disclosed in detail in 10-Q, 10-K, and 8-K filings since ACM's IPO. We encourage you to review these disclosures for more details on the matter. In summary, we view this as a good outcome that represents forward progress towards the STAR Market IPO. Moving on. Net interest income was $0.1 million versus a net expense of $0.2 million in the year-ago period. The difference was due primarily to increased interest income earned on a larger cash and restricted cash balance. Net income attributable to ACM Research was $6.2 million versus $4.9 million last year. Net income per diluted share was $0.29 compared to $0.26 in the same period last year. Now I'll review the balance sheet items at the end of the second quarter. Cash and equivalents were $86.4 million at quarter-end, up from $52.3 million at the end of Q1. The quarter-on-quarter increase was due primarily to the release of restricted cash from the PE investments, which were previously held in reserve pending submission of the STAR Market IPO application. This was partly offset by the investments David mentioned in the Lingang facility and participation in the SMIC IPO and net cash used in operating activities. Short-term borrowings were $25.8 million, up from $3.9 million at the end of Q1. Total inventory was $49.7 million, up from $45 million at the end of last quarter. Of the total, finished goods inventory increased to $17 million from $11.6 million at the end of last quarter. The $5.4 million quarter-on-quarter change represents a net increase of first tools that have been shipped to customers for evaluation. Note that finished goods inventory is carried on ACM's balance sheet at cost, pending customer acceptance and revenue recognition. To conclude, we are participating in the growth of major new IC fabs. We are ramping production and we continue to develop and deliver innovative products. We are optimistic about our opportunities in China and expansion outside of China, and 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 Instructions]. And our first question comes from the line of Quinn Bolton from Needham & Company.

Hey guys, congratulations on the nice results and the higher outlook for 2020. Maybe just wanted to start with the announcement yesterday of the $36 million of orders. Can you give us a little bit more detail on timing and delivery of those tools? And it sounds like it's for a pretty full suite of your cleaning products.

Okay. Thank you. So actually, this is the 2 new customers we're penetrating in the China market. And as we indicated, both customers' major product is analog and also power devices, such as IGBT. I think we've got very good traction from them. And both companies ordered multiple products, totaling $36 million. We're still negotiating more of their POs and their progress also. So it's a very good market in China. As I mentioned, this is a fast-growing analog market with opportunities in 5G and electrical vehicle IGBT devices. We can also see a digital customer may come out to play in this field. Our semi-critical process tools, including our auto wet bench and backside cleaning scrubbers, as well as some SAPS tools, are highly appreciated. We see customer interest in our copper plating tool. As the product develops, our vertical furnace will also attract their attention, targeting future applications for BSBD or high-temperature Neo.

And David, just to confirm, these are more than just bids going out, that these are confirmed orders that you have now received from those customers?

Actually, $33 million is a portion of its deal and in the final bidding process. The typical Chinese customer has to go through a formal bidding process. However, before the bidding, they mostly select the technology and specifications and all their requirements that they feel comfortable with before putting in the bidding process. Yes, both.

Okay. Okay. And then on Tahoe, congratulations on the second shipment of a production tool. But I think you also mentioned delivering additional evaluation tools later this year. Just wondering, are those all within your existing Chinese customer base? Or are those also starting to sample to a wider base of customers, potentially even outside of China?

Yes. Okay. I should say, at this moment, we talk to our existing customer base. We also see the interest from new customer Phase II. So we see a couple of opportunities right now, and hopefully, we can capture both.

Great. And then just last question for me on the U.S. delivery of the SAPS tool to the OEM demo lab. Can you talk to us about how that helps the business? It sounds like you wouldn't sell additional tools to that OEM, but it seems like perhaps more of a sort of cross-selling or joint selling opportunity. As IDNs come into that demo lab, they see your SAPS tool, and hopefully, you would gain SAPS orders as part of that equipment set. Is that the right way to think about that arrangement?

Yes. Let me give you the background. This is an OEM customer, and due to NDA, we're not allowed to disclose the name. They have a special requirement to do pre-cleaning and post-cleaning processes. They found our tool running very well from existing customers in Asia. The cleaning is critical in their process to ensure their performance. This selection of our cleaning tool is essential for their production process. From our perspective, we view this as a good partnership; they value our tool and help the process. We hope this integration process will benefit both sides. The installation in this demo lab has been completed, and we expect our cleaning capability will enhance their performance, leading to improved penetration for their next-generation devices.

[Operator Instructions]. And your next question comes from the line of Patrick Ho from Stifel Nicolaus.

Congrats on the nice quarter and outlook. David, maybe first off, in terms of the ramp that you're seeing now. A little bit of it was built up from pent-up demand from the March quarter when restrictions were in place. But we're getting indications that overall Chinese capital spending is increasing. Do you believe some of this is the Chinese industry pulling in, trying to get as many tools and ramp up capacity as soon as possible? Or is the timing from your perspective within the range that you looked at for 2020 as a whole before COVID-19?

Well, that's a good question. Many of our existing customers only give predictions or projections even early this year. So our existing customers are following their plans exactly, executing very well, and not being much impacted by COVID-19 after January. Additionally, we are seeing new customers emerging, like the two new customers we have POs and also bidding processes with. They are gaining our attention and becoming our new customers. They are also increasing their fab investments, leading us to believe that the Chinese semiconductor equipment market will continue to grow. We anticipate better growth next year than this year, based on our information.

Great. That's helpful. And maybe as a follow-up question for you, Mark, in terms of the inventory levels. You answered the question in the prepared remarks about the evaluation units on the inventory line. But at the same time, as you're looking at a bigger ramp potentially in the second half of the year, how are you managing core parts inventory? Are you still seeing any supply chain disruptions? Or is it more of a normalized operation in terms of your parts and inventory procurement for building systems?

Yes, no, Patrick, thanks for the question. Our shipments are looking pretty strong for the back half of the year. We provided our revenue outlook. The two new customers will be shipments but probably not revenue this year. Our factories will be quite busy through year-end. Regarding the supply chain, we've conducted a lot of work; many of our suppliers are located in Asia. China is certainly back to business as we speak. There are some components we have to source from Japan or even some from the U.S. where we have seen lead times stretch out. But we're managing it closely, and we feel we've mitigated any potential issues. There is nothing at this point that we expect would interrupt our plans for the back half of the year.

And your next question comes from the line of Suji Desilva from ROTH Capital.

Congratulations on the progress here. Very impressive. So the 2 new China analog power customers are a new category for you guys. David or Mark, can you talk about the addressable opportunity in the analog power customers longer-term versus the existing memory or foundry customer sets? Just the relative sizes. Are there additional analog power customer opportunities either in China or globally that become available with this break into these two?

Yes. Actually, as I said, this is a new customer, and this is a big demand and market demand in China. We view this as a very good opportunity; we've been working with them since the end of last year. We're thrilled that our tools have been selected, and they provided us their batch order due to their rapid fab expansion. As we are starting with one tool, we believe there is great potential as we transition into Phase 2. Additionally, they rely heavily on our technology, referencing successful installations in other locations. This instills confidence in us and guides them to provide us with a batch order. This indicates a strong market opening window for us to penetrate the power and analog devices market.

Yes, Suji, just one thing I'd add. In David's prepared remarks, we talked about the total addressable market (TAM). So we've always discussed our core cleaning products, and previously we spoke about SAPS, TEBO, and Tahoe addressing about 50% of the $3 billion cleaning TAM. With the addition of the new semi-critical tools, we've expanded that to 80%. In looking at it by product basis across all the different segments, that's how we factor it into our TAM calculation.

That's very helpful. Also on this U.S. partnership announcement, how does this partnership progress from here? What are the next milestones and timeframes for an opportunity now that you're in that lab?

Well, actually, this OEM demo lab they're likely going to purchase our tool. Our goal is to work closely with this partner, enabling them to benefit from our clean technology, thereby demonstrating better performance at customer sites. Meanwhile, this presents a potential window for us to engage other customers globally in the U.S. We see this as beneficial collaboration. Cleaning has become increasingly essential in their processes, and we are confident that our technology will be vital in improving yields.

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

Congrats on a great quarter. I just have one quick follow-up question regarding SMIC. What is your potential revenue opportunity in the new 100,000-wafer-start-per-month fab, given the products you're working with as a valued supplier?

Yes. SMIC has two major efforts: expanding their fabric capacity, specifically on 28-nanometer manufacturing nodes and above in their Beijing fab and the new 100,000 wafer investment of around $7 billion. We are well-positioned for revenue growth in this fab; our SAPS, TEBO, and Tahoe core technologies are heavily utilized in this semi-critical process, order bench, backside cleaning, and scrub tool market. We also believe our ECP map will be attractive to them for fab expansion. Additionally, we're pursuing vertical furnace opportunities, having passed the debugging process in another foundry in China.

Fabulous. Can you provide clarity if you expect shipments for new activity to begin being recognized in size sometime in the second half of this year, or is that more of a 2021 event?

Yes. I would say SMIC has already placed substantial orders, right? Even in their existing 28-nanometer expansion in Beijing. So I believe they will be ranked in the top three by the end of this year. In fact, SMIC would rank among the top three customers along with 1TC and Huahong Huali Group. Beyond that, I see potential muted recovery in DRAM contributing to revenue from Hynix and other new customers in China.

Yes, Christian, one other thing. So for SMIC, they have been a customer for a while, but we've been underrepresented there. There are some tools we shipped before that haven't yet been accepted, which will be taken as revenue. However, certain tools will be considered first sales this year, with the timing of revenue coming both this year and next year.

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

David, Mark. Also, congratulations on your great results and adding those new customers. My first question is really about your progress on other overseas customers, including the top foundry customer and also another U.S. IDN. Can you provide updates on those customer wins?

Yes. We're working very closely with the top 2 tiers; one is a major customer in Taiwan and another one in the U.S., which also has memory fab operations in China. This year, we're hopeful to penetrate at least one of them. We feel confident; our SAPS, TEBO, and Tahoe products are appealing to them. The trend toward cleaning technology security has heightened their interest, and we're making steady progress.

Sure. So I guess the next question is to the CFO. I'm impressed with your gross margin in the second quarter at 49%. What's the right way to think about your long-term gross margin trend, considering product mix, higher revenue scale, and the new factory ramp? Is 49% sustainable, or do you see potential upside in the long run? Also, a very small question about your one-time financial liability loss. The press release suggested that, that terminated in July. Does that mean you are going to reverse that loss to a gain in the third quarter?

Yes, Charlie. That's a good question. We're pleased with the gross margin this quarter as it relates to product mix and scale. We encourage the expectation to be 40% to 45%. While we don't want to get too excited about a big quarter favoring down one or two tools, we also expect to be within the mid-range of our outlook. For your modeling horizon, we prefer to maintain that long-term outlook at 40% to 45%. Let me explain the noncash nonoperating charge, which is a technical accounting issue with no impact on non-GAAP. This was due to an obligation related to the STAR Market IPO where shares were surrendered on April 30. As a result of this, the share price fluctuated, and the resulting loss will carry into Q3 results but will not reflect as a book loss in our income statement. It's a good outcome towards our STAR Market IPO.

[Operator Instructions]. All right. Seeing no more questions in the queue, let me turn the call back --

Wait, wait. Operator, we see two more questions.

Mark Miller?

Yes, next is Mark Miller from The Benchmark Company.

Congrats on your new customers and your momentum here. I wanted to ask about your new products. The R&D costs went up by almost 50% in the June quarter. Where do you see R&D trending for the rest of the year?

Yes, that's a good question. We maintain discipline in balancing our near-term profitability with longer-term opportunities. As the revenue increases, we are investing in additional new products. R&D for the year is expected to stay around $5 million per quarter. If additional revenue comes in, we might increase that to expedite new product development.

Okay. And just in terms of your new plant. As you load that plant, would you expect that to have a favorable impact on your margins as factory loading increases in the second facility?

The second facility -- yes.

The new facility, we have purchased land rights for 50 years. Our new factory will integrate sophisticated manufacturing systems, incorporating automation into the process, which will help reduce manufacturing costs. Moreover, improved precision in machine assembly and inventory control will enhance our efficiency. Thus, over the longer term, we anticipate achieving significant cost savings by evaluating our space utilization and supporting our R&D capability.

Yes, Mark, I think one of the earlier questions asked about our longer-term gross margins. So yes, we would hope that we can reevaluate our margin range with these improvements, but really, it's key to track larger customers. It's not just about a great product but also about the balance sheet and services organization and mainly the production capacity. This facility aims to support our efforts with bigger customers.

Yes, actually, we evaluated the long-run cost between continuing to rent a facility versus building our own. Over the long term, we project saving roughly 50% to 65% compared to rental prices. Furthermore, we will have a permanent R&D facility, which allows us to invest while we can regain control and flexibly improve our lab capabilities. This strengthens our overall operational capacity.

And your last question comes from the line of Krish Sankar from Cowen & Company.

David and Mark, congrats on the really strong results. I had a couple. David, when you look at the single-wafer clean product, now that you're shipping to a wide range of customers, how would you characterize the single base of clean intensity between logic, foundry, memory, and now analog and IGBT customers? Who is the strongest segment and who is the weakest?

Yes. Looking at last year, our logic versus memory segments were nearly equal, with probably 50% for each. This year reflects a similar trend, still close to half. We have roughly three memory hubs currently buying our tools. One is SK Hynix, the other two being YMTC and a tool qualifying in hub 8. We continue exploring new memory facility customers. On the foundry side, we are also targeting logical devices but now branching into analog and power devices.

Got it. And then for Mark, a two-part question. Thanks for the insight on gross margins. How should we think about operating margin? Will it scale with revenues? Or will ebbs and flows occur since new product introductions might impact operating margin?

Yes, it's a good question. On the operating margins, we often emphasize balancing near-term profitability with expanding product line opportunities. We're actively investing now due to customer demand that we are seeing, leading to an uptick in R&D and spend in Q2. I'd say mid-teens operating margins are what we expect.

At this moment, we focus on balancing our spending with profitability. We’re heavily investing in R&D and additional sales and marketing activities, yet, we also strive to maintain profitability. So far, we've managed well in this regard, thereby continuing to explore new product avenues and capturing more customers locally in China and abroad.

Yes, Krish, one other point. As we begin shipping tools whose revenue won't be recognized immediately, this will drive operating expenses and result in higher costs, along with demo tools that won't appear in revenue until later, impacting operating margins.

Seeing no more questions in the queue, let me turn the call back --

Okay. Thank you, operator, and thank you all for participating in today's call and for your support. Before we close, Gary is going to mention some upcoming Investor Relations events. Gary, please.

Thanks, David. We have several events coming up over the next few weeks. All of these are virtual at this point and invitation-only. If you want to meet with us or attend the presentation, please contact your respective sales representative. On August 13, we'll participate in the Needham Virtual Semi Cap and EDA conference. On August 27, we'll attend the Nomura Virtual China Investor Forum. Also, we'll participate in the Jefferies 2020 Virtual Semiconductor IT Hardware and Communications Summit on September 1. And on September 9, we'll attend Citigroup's 2020 Global Technology Virtual Conference. Finally, on September 11, we'll participate at the Crédit Suisse Asia Technology Virtual Conference. This concludes the call. Thank you for attending. You may all now disconnect.

That does conclude the conference for today. Thank you for participating. You may all now disconnect.