ACM Research, Inc. Q1 FY2021 Earnings Call

Good day, and thank you for joining us for the ACM Research First Quarter 2021 Earnings Conference Call. All participants are currently in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. I now hand the conference over to your speaker today, Gary Dvorchak. Please go ahead.

Good morning, everyone. Thank you for joining us on today's call to discuss first quarter 2021 results. We released results after the U.S. market close yesterday. The release is available on our website as well as from Newswire services. There is 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 Fang, the CFO of our operating subsidiary, ACM Shanghai. Before we continue, please turn to Slide 2. Let me remind you that the remarks made during this call may include predictions, estimates or other information that might be considered forward-looking. These forward-looking statements represent ACM's current judgment for the future. However, they are subject to risks and uncertainties that could cause actual results to differ materially. Those risks are described under risk factors and elsewhere in ACM's filings with the Securities and Exchange Commission. Please do not place undue reliance on these forward-looking statements, which reflect ACM's opinions only as of the date of this call. ACM is not obliged to update you on any revisions to these forward-looking statements. Certain of the financial results we provide on this call will be on a non-GAAP basis, which excludes stock-based compensation, a loss relating to the change in fair value of a financial liability, and an unrealized gain in trading securities. For our GAAP results and reconciliations between GAAP and non-GAAP amounts, you should refer to our earnings release, which is posted on the IR section of our website. With that, let me now turn the call over to David Wang, who will begin with Slide 3. David.

Thank you, Gary. Good day and welcome to today's call. We are off to a great start with solid results. For the first quarter, we delivered stronger revenue growth, record shipments, and excellent profitability. First quarter results demonstrate the competitive strength of our technical expertise, the strength of our product portfolio, and our growing production scale. Revenue grew to $43.7 million, up 80% year-over-year. Shipments were $74 million, up from $67 million last year and up from $4 million in the first quarter of 2020. We delivered a good balance of growth and profitability with a 41.4% gross margin and an 11% operating margin. We are committed to delivering profitable growth as we continue to invest in R&D for new products and global sales and marketing. On the bottom line, we report $0.35 of net income per diluted share, up from $0.11 last year. We ended the quarter with $79 million in cash and ACM market share was $27 million equivalent as of quarter end. I will now cover recent operational highlights. First, our Q1 revenue growth was broad-based, driven by current and new products and customers, with other products representing 73% of total sales in Q1 and growing 42%. Our advanced packaging and other process tools and services in the space business accounted for the remaining 27%. Our revenue is up six times year-over-year. We have five major prime customers in foundry and DRAM and several back-end packaging customers. For newer customers, we manufacture power and analog devices. During the first quarter, we received orders from one of the key customers. We are engaged with the remaining two players with the goal of receiving orders later this year. Additionally, we penetrated two additional advanced packaging houses and one compound semiconductor IC manufacturer. We believe our existing front-end and back-end customers alone represent a significant opportunity for ACM as many are in the early or middle stage of multiyear capacity expansions. Second, we delivered total shipments of 74 million in the first quarter, another record for the company. This is a major accomplishment during a Lunar New Year holiday period and reflects our production team's efforts to meet strong customer demand. Our regional facility includes our R&D, SG&A, and prototyping and production of newer products. We expanded production capacity by reducing downtime at our factory, allowing us to gradually increase capacity to over $500 million. Our long-term plan is to build a production center in the Lingang region of Shanghai that will enable us to increase our annual production capacity to $1.5 billion. We expect additional architectural and design work to be completed this quarter with initial production targets by the end of 2022. Third, we invested in our global sales team by hiring a new leader for our U.S. and Europe sales effort last year and added several other senior employees. Our team remains engaged in technology discussions and evaluations with U.S. and Taiwan-based semiconductor manufacturers and we are making good progress. Fourth, we continue to gain traction with our ECP goals, particularly in smaller geometries that require advanced cleaning solutions. Our ECP product line includes new technology that enhances our market position. During the quarter, we introduced proprietary high-speed copper plating technology that improves uniformity, crucial for advanced packaging. The ECP product line is projected to expand significantly in the near future. Fifth, we recently acquired an ultra FN furnace dry powder tool portfolio, enhancing our offerings with best-in-class requirements that meet device complexity demands. We expect to deliver more units throughout the year and plan further developments in our furnace product line. Overall, we are making substantial progress with our new product lines. Our current product addresses a market of more than $5 billion and we are committed to becoming a multi-product company, with meaningful contributions from our newer products starting in 2021. We have begun significant R&D investments in new product categories to double our total addressable market. Regarding our IPO, we continue to make progress and remain confident in receiving the necessary approvals. Our guidance for revenue in 2021 ranges from $205 million to $230 million with 39% annual growth is based on several key assumptions, including the improving global COVID-19 situation and stability in U.S.-China trade policy. Our results and outlook support our strategies, with a focus on scaling production capacity to become a major equipment supplier for the global semiconductor industry. Thank you to our employees for their dedication, as well as to our customers, partners, and shareholders for their continued support. I will now turn the call over to Mark to discuss the financial results in more detail.

Thank you, David. Good day to everyone. As David indicated, we are off to a good start in 2021. I will refer to non-GAAP financial measures, which exclude stock-based compensation and unrealized gains in trading securities. A reconciliation of these non-GAAP measures to comparable GAAP measures is included in our earnings release. Now for the first quarter. Revenue was $43.7 million, up 79.6%. You may have noticed more detailed reporting of our revenue in yesterday's earnings release. Revenue for single-wafer cleaning tools, which include SAPS, TEBO, Tahoe, and our Semi-Critical Clean, was $32.4 million, up 42% from $22.89 million. Revenue for ECP furnace and other technologies was $5.6 million compared to zero in the first quarter of 2020, and revenue for advanced packaging, excluding ECP, services, and spares, is $5.8 million compared to $1.6 million in 2020. Total shipments were $74 million, compared to $12 million in the first quarter of 2020, and $67 million in the fourth quarter of 2020. This includes revenue deliveries for the quarter and systems awaiting customer acceptance for potential revenue in the future. As David mentioned, this was another quarter of record shipments, a great accomplishment by our production team during the shortened Lunar New Year holiday. Gross margin was 41.4% compared to 42.2%, in line with our normal expectation of 40% to 45%. We expect gross margin to vary on a quarterly basis due to factors such as product mix and manufacturing utilization. Operating expenses were $13.5 million compared to $8.4 million, reflecting higher R&D on new products, sales-related activity, and preparations for the China Serve Market IPO. Operating income was $4.7 million, up from $1.9 million, with an operating margin of 10.7% compared to 7.8%. The unrealized loss on trading securities related to the change in market value of SMIC investments was $1 million in the first quarter of 2021, which we exclude from our non-GAAP results. The tax benefit was $2.8 million compared to a tax expense of $304,000 in the prior year, primarily due to stock options exercised during the quarter. Net income attributable to ACM Research was $7.7 million compared to $2.4 million in the previous year, with net income per diluted share at $0.35, compared to $0.11 in Q1 of 2020. Tax items and the effects of foreign exchange fluctuations provided a net benefit of $3.8 million, or $0.17 per share, in the first quarter of 2021 compared to a net benefit of $0.6 million, or $0.03 per share, in Q1 of 2020. Now I will review selected balance sheet items. Our cash balance was $78.8 million at the end of the first quarter, up from $71.8 million at the end of 2020. In addition, we had traded securities valued at $27 million related to our SMIC investment. Short-term borrowings at quarter end were $23.5 million, down from $26.1 million at the end of the fourth quarter of 2020. Long-term borrowings were $17.4 million. Total inventory was $103.2 million at quarter end, compared to $88.6 million in the previous quarter, primarily due to growth in finished goods inventory. This represents tools delivered to customers for evaluation and pending acceptance, which grew to $47.1 million at the end of Q1 from $2.4 million at the end of Q4. The combined balance of work in progress and raw materials remained essentially unchanged over the same period. For 2021, our base case for capital spending is $10 million to $15 million. Our investments will focus on capital increases for factories, as well as R&D programs and some initial spending on Huahong. In summary, we continue to execute on our strategy, participating in the growth of major new IC fabs. We are ramping production and developing and delivering innovative products to broaden our customer base. We are optimistic about our opportunities in and outside of China, and we remain committed to our mission of becoming a major player in the semiconductor equipment market. Now let's open the call for any questions.

Your first question comes from the line of Patrick Ho from Stifel.

Thank you very much. And congrats on the nice quarter. This is first off in terms of the increase in inventories and the increase in shipments. Maybe Mark, if you can just give a little bit of detail whether you experienced any component shortages or any supply constraints. Given that your revenue levels were very healthy, it doesn't seem like there were any issues but if you could detail some of the issues you may have had to manage through during the quarter?

Maybe I will let David go ahead and start.

Actually we sit at the main higher right, we have got a lot of demand from the customers, either existing customers or new customers. We do feel pressure in our supply chain, with our components' lead time getting longer. So, in that area, we actually project and therefore, we published through some loan leading items. At that point, we are purchasing from our vendor, trying to manage the delivery time. But again, this is something that is a real dynamic changing situation, right? With some factories, some supplies come out from the supply chain, and because of vendor orders coming in. So, I should say, yes, there are definitely challenges right now and I should say also maybe especially the media and analysts here, we see that probably the trend of delayed orders will continue. So, it is good to have it but as we can, also expanding our capacity, hiring more people and ensuring quality work and successful operations as we move later into the year. Mark, do you want to add anything to that?

Actually, David, I think you covered it well. We can have another question.

Yes. My follow-up question maybe you can talk - gross margin came in the range that you guys have previously talked of 45%. But at the same time, a lot of increasing utilization you also have start-up pull ups, all of these areas. Over the next couple of quarters, how do you look at those inflows and which were the biggest one we should be looking out for?

Yes. You bet, Patrick. So, on the gross margin side, Q1 reported 41.4% in our normal 40% to 45% range. This is due to, it is almost due to product wins. So, Q1 we had a higher mix of Semi-Critical and back-end products, which carry over lower relative margins. And these are new early-stage products that haven't necessarily hit the volume or we have been able to achieve significant amounts on them. So, the newer products, we do expect the margins on those products to mature, many balance that. The other side of the mix is our ship trading tools, where we achieve very good margins so, no change to our projected gross margin range of 40% to 45%. David, do you have anything to add?

Yes. Mark explained it very well, and you clearly pointed out that there is a mix of low-margin and high-margin products. Over time, as the volume increases, particularly with the introduction of Semi-Critical products, we can enhance our manufacturing efficiency. This leads to higher quality, which in turn increases our margins and pricing relative to manufacturing costs. We believe we will remain within our target range of 40% to 45%, and we are optimistic about our ability to maintain this range. As we move forward, we will continue to strive for greater efficiency and improved product quality, ensuring more stable processes and gross margins.

Great. Thank you very much.

You have a question from the line of Donnie Teng.

Hi. Good evening, David and Mark. Congrats on the good results. The first question is regarding your shipment and revenue. So, it looks like we have strong shipment trends in the second quarter of 2020. But, it looks like our sales trend was a little slower since the fourth quarter last year and the gap between shipment and sales is getting bigger. So, I understand that we need to shift to customers first and then wait for customers' acceptance. So, just wondering how are we able to resolve this kind of huge gap going forward? And is there any, if you are seeing any longer acceptance period by your customers or is there any other issues? Thank you.

Thank you, Donnie. In reviewing the past year and this quarter, we are observing an increase in new customers. Typically, new customers, even with our established products, do not contribute to recurring revenue until their policies are qualified in the production line. While we have welcomed many new customers, the transition involves a new production line, which means it takes longer to prequalify our mature products. In the meantime, we are supplying new tools to our existing customers, as you pointed out, along with advanced packaging tools. Additionally, there are new frontend developments. This process, whether for new or existing customers, is taking longer than we usually expect. There are steps we need to follow related to our semiconductor business, which involve ensuring we meet customer requirements and address any issues that arise. That is our aim. However, based on our history, we are optimistic that we will continue to deliver our first tools to new customers. It's really about timing, and we are committed to following through with this process. Mark, do you have anything to add?

Yes, no, I think you covered it well, and I don't think we have seen any change in the timing of the substance rates at a broad level as part of our outlook is tougher for when we are getting acceptance on those and so when we mentioned that as one of our guidance dependencies.

So, simply to say, that we are extending the new more and more and more new equipment. So more shipment but probably longer preparation time. Is that correct?

Really, actually, it depends on the product, right? And some products, we have got our senses that we do within six months, but I should say regularly, six months, a one-year timeline, and we will do a series on difficulty, a tool or maybe longer than one year, right? So, major tools are qualified within six months to one year timeframe, that should be no change.

And my second question is really regarding your full-year guidance. So, based on the very strong and actually, as you have seen a lot of foundry or memory companies have started to add CapEx. So, just wondering if there is any chance that our sales momentum in the second quarter or beyond to be stronger than our expected. And also could you comment on the European market although because sales were quite slow last year and so I was just wondering when are we seeing a DRAM sales from DRAM can start to pick up this year? Thank you.

Okay. Yes, good question. Actually, we see that we are observing demand becoming stronger. I mean, our Q2, our Q1 was very busy. I can say for the Q2 - and even the Q3 and Q4 is a pretty high, right. I work on amazing Wednesdays because new customers and new products are coming out and we are really balancing the revenue versus the shipment. And if I say for maximum revenue, obviously I should take it on appeal or you are risking customers' orders. However, we are also balancing new customers and new tools. So, it is really kind of innovators' dilemma here right. We need to maintain good new customer future revenue at the same time as we prioritize existing orders. So, I think we are going to strike a very good balance in that and then lead the revenue obviously and at the same time we also have new product or new customers. Right, that is what we did for your first question. For the second one, probably you see, we also notice that there is a customer, Hynix, who will probably increase their spending rates this year, and we have very good news and media from other vendors feels long lead items when we make assumptions, we are real actual working with our customer. And maybe I can report to you an issue for the database so this moment we are still kind of waiting for their instructions for the DRAM.

Okay. Thank you.

Thank you. We have a question from Suji De Silva from Roth Capital Partners.

Hi, David. Hi, Mark. Congratulations on the progress here. Can you talk maybe about lead times according to your customers versus three months ago and your ability to meet demand whether it is surging or whether it has been pretty steady? Can you control your own manufacturing?

You are asking about our lead times right now. Is that correct?

Yes, your lead times according to your customers if they are extending at all?

Okay right, you can apply that, right. I should say our normal lead time used to be about four months. And obviously that has extended, right? In some products, you can go through five months, and some even longer. The reason for that is certain components or systems or several components requiring a longer and longer order time requiring more lead time. So, we see a longer average, I should say between five to six months right now.

Okay, great. And then you mentioned in the press release global customers and opportunity there. Can you update us on remaining steps like additional customers? It sounds like you have visibility for shipments potentially into qualification there. But any color there will be helpful?

Yes. I think we are actively working with the customers and making that as we mentioned, and we did it months ago to demo for one customer, and so far the result there is satisfactory and we are in negotiations right now. So, hopefully we can win the customer and which is a timeline. Also we are working with additional other first-tier customers too. As we mentioned, we got one this year; maybe we can make it more, that is our goal.

Okay. Thanks. One last question on IPO. Do you have a sense that the report you filed, you need to have further comments or responses or a second report required? Do you have any remaining steps like these? Thanks.

Good question. We have been actively working on it for the past three to four months, and we've seen similar situations in China. In China, there were reports produced earlier around February and March that continue to be significant. We are currently engaged in active discussions about this. By April 30, we aim to complete the report requirements and seek final acceptance, which we are still waiting for. Once all reports regarding acceptance are finalized, we will move towards the registration process with the CSRC. We are now in the final stage of report acceptance and are close to the registration with the CSRC at this time.

Okay. Great. Thanks, guys.

You have a question from the line of Charlie Chan.

Hi, David. Hi, Mark. Congratulations on the results. Just to follow that question from Suji about IPO timing. So, when your report gets affected by, does that mean they need to review or just needs to be quicker?

It is difficult to predict. As I mentioned, we can see that 95% of our job is already done, and we are hoping to reach 99% or 100%. However, there may be more elements to add. At this point, we are uncertain about the timeline. It could take one or two weeks or even longer. For now, this is the status we have. The primary acceptance process is ongoing, but we believe we have accomplished most of what we can along with all the requests received so far. Our team including thinkers, lawyers, and our firm has done an excellent job. At this moment, we certainly recognize that patience is essential.

Okay, I understand. I think Donnie previously asked this question. Regarding foundries, I believe Vanguard UNC has adjusted their CapEx, with reductions of around 50% to 70%. Have you noticed similar adjustments from your customers, particularly in China, over the last month and a half?

You can see that Intel has made significant expansions. In China, our customers have long-term expansion plans, and I haven't noticed any changes in the market over the last two months. They are increasing their operations, and particularly for customers outside the U.S. and in Beijing. We've noticed rising demand from existing clients as well as interest from second-tier customers, with several edge customers mentioning new opportunities. Demand in China remains robust. While there are some reports of customers waiting for licenses, the majority are continuing with their projects. Overall, I observe a gradual strengthening in demand from customers in China.

And then, also good control on OpEx in the first quarter, I mean it is 33% of OpEx ratio. So, maybe this question to Mark. So, for the upcoming two to three years period still - do you still think the organization will still be around 30%? Is that kind of right by the assumption for the coming two or three years?

Yes, Charlie, on that front. I mean, obviously, we cannot guide a lot on that area. But this year, we are investing pretty heavily in R&D, sales and marketing, what have been so. So, a few years, we would obviously like to see some leverage, and some better leverage on the top line. Longer term, we would like to get our top line growing faster than our operating expenses.

I would like to add that in the next few years, we will definitely continue to invest in research and development. As I mentioned, we have emerging trends that will drive demand for new products, which will necessitate increased R&D investment. R&D will be our top priority. We are performing well in sales and marketing in Mainland China, similar to our efforts in Korea. However, we also see potential in Taiwan and the U.S., and possibly even in Europe. The market itself will also support investment. I believe we need to focus on finding a balance between profitability and growth opportunities. Therefore, we will likely need to put more effort into growth, especially in sales, marketing, and product development, which are our major spending areas.

Yes. That brings me to my last question. David, can you give us some direction or timing about when are you going to add a new - and can you update your 10? I think currently it is like $5 billion and any - you expand to $10 billion in the coming year?

Yes. That is a good question. Actually, as I mentioned, in the last earnings call. We are already doing two new products development. One is earlier and one is later. I think that probably by beginning next year for our first product and then hopefully we can get the second one come out later next year, that is a timeline. We are already started this initial quarter feasibility study and initial R&D, almost a year ago, right. So it takes time, but these are excellent teams both in Korea and in China, and I think they are very efficient and also we have very good sales channels and understanding customer requirements and also with our sovereign control and systems, all look kind of thing are really adding our speed from R&D part to market. So, we will continue our efforts and these will be two new products that will add to our existing $5 billion addressable market, as we think about the future product addressable size, it will be beyond $10 billion, that is our target and goal.

Okay. Great. Thanks for your answers. Thank you.

You have a question from Quinn Bolton at Needham & Company.

Sorry, guys. I was on mute. Congratulations on the results. With start of the shipments, you have seen very strong shipments of the past three quarters increasing from $59 million in the third quarter to $74 million here in the first quarter. Is there any reason why you would think that, that trend in shipments would take a big step down over the next couple of quarters, or do you expect shipments to remain at pretty healthy levels?

Yes. Quinn, very good question. I think our shipment will continue to increase, right. That is what happened here - where PAC was appealing, right. However, we are struggling to make manufacturing capacity increase. And we are also balancing the deal versus new tools. So, that is what right now. Obviously, there is another factor we will know is the supply chain...