ACM Research, Inc. Q3 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the ACM Research Third Quarter 2021 Earnings Conference Call. At this time, (Operator Instructions) After the speaker presentation, there will be a question-and-answer session. (Operator Instructions) I would now like to hand the conference over to your first speaker today, Gary Dvorchak. Please go ahead.

Good day, everyone. Thank you for joining us on today's call to discuss third quarter 2021 results. We released results after the U.S. market closed yesterday. The release is available on our website as well as through newswire services. There's also a supplemental slide deck posted on the investor section 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. I want to remind you that remarks made during this call may include predictions, estimates or other information that might be considered forward-looking. These forward-looking statements represent ACM's current judgment for the future; however, they are subject to risks and uncertainties that could cause actual results to differ materially. Those risks are described under Risk Factors and elsewhere in ACM's filings with the Securities and Exchange Commission. Please do not place undue reliance on these forward-looking statements, which reflect ACM's opinions only as of the date of this call. ACM is not obligated to update you on any revisions to these forward-looking statements. Certain financial results that we provide on this call will be on a non-GAAP basis, which excludes stock-based compensation, a loss relating to a change in fair value of the 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. With that, let me now turn the call over to Dr. Wang, who will begin with slide three. David?

Thanks, Gary. Good day, and welcome to today's call. We had an excellent third quarter with strong financial results. We delivered record revenue and shipments with solid profitability. Third quarter results demonstrate the strength of our expanding customer base, our differentiated multi-product solutions, strong product cycle for both front end and back end, and our growing production scale. Revenue grew to $67 million, up 41% year-over-year. Shipments were $99 million, up 68% from $59 million in the same period last year. We maintained a good balance of growth and profitability with a 44.5% gross margin and 19.5% operating margin. We are focused on profitable growth as we invest in R&D to drive innovation, broaden our product portfolio and introduce new products. On the bottom line, we report $0.56 of net income per diluted share compared to $0.42 in the same quarter last year. We ended the quarter with $65 million of cash. In addition, we had $30 million a quarter and from our holding of SMIC's stock market shares. I will now discuss recent operational highlights on Slide 3. First, our Q3 revenue growth was broad-based, driven by hiring and new products. Our wet cleaning and other front-end process tool grew 29% and represented 70% of total sales in Q3. The growth was driven by our flagship cleaning SAPS tool, good contribution from TEBO cleaning tool and our Semi-Critical cleaning tools. Advanced packaging, other process tools, services and spare parts grew by 88% to 26% of sales. The strong growth of this group was driven by AP tools, including ECP AP, wet etcher, stripper and scrubbers together with the increase in our service and spare parts business. Second, we received good orders from 3 new major customers. Several weeks ago, we announced evaluation orders from 2 potential new customers. The first order is for SAPS cleaning tool from a major global semiconductor manufacturer and is scheduled to be installed in their China-based development fab in the first quarter of next year. The second order is for Ultra ECP map copper plating tool from a major Asia-based semiconductor manufacturer. Also for delivery early next year, yesterday, we announced an order from a leading global integrated device manufacturer or IDM, orders for 2 Ultra C pr wet stripping system to be used in a China-based advanced packaging facility. We already delivered the first order in October and planned a second delivery in Q1 of 2022. ACM offers a full product line of WLP white process tools, ranging from coater, developer, wet etcher, cleaning and PR strippers to advanced copper plating tools. While our WLP wet process tools have gained wider acceptance with a number of China-based manufacturers, this order is ACM's first WLP wet tool orders from a major global player. ACM's progress with 3 new major players is a testament to our technology leadership, regional support teams and production scale. We are confident that successful qualification of this tool can result in larger business opportunities. We continue to build our scale. Our sales pipeline is a top-tier player. I want to thank our sales and technical support teams for their outstanding execution. China is among the largest and fast-growing markets for semiconductors. Over the year, ACM has become a significant supplier of semiconductor equipment in China with our major domestic front end customers. We believe ACM's differentiated technology and multi-product offering provides us an opportunity to capture significant market share on a global basis. Longer term, we are targeting half of our sales from countries and regions outside of Mainland China. Third, our ECP product ramp is gaining momentum. We delivered multiple ECP tools in the first half of 2021 and even more in Q3. As noted in last quarter's call, we expect the ECP momentum to continue with the delivery of 20 ECP tools for the full year 2021. We expect the ECP product line to drive meaningful growth in 2022. We see good opportunities for ECT in both front-end and back-end or packaging applications. In the front-end, smaller geometry requires advanced plating solutions. Our ECP portfolio includes the ECP map for damascene copper interconnection and ECP TSV for through-silicon via. Meanwhile, back-end and advanced packaging have become more important as the industry moves. Manufacturers are looking for packaging innovation to drive higher performance. ACM's ECP AP for advanced packaging addresses this back-end opportunity. We estimate that the total global market for ECP front-end and back-end application will triple from $500 million last year to up to $1.5 billion in the coming years. Fourth, we are seeing strong interest for our Ultra Fn furnace dry process tool portfolio. So far in 2021, we delivered several process tools and evaluation tools, including doped and undoped poly LPCVD. We expect to deliver additional units by year-end. More recently, in October, we shipped furnace products with higher temperature oxidation and new lead capability. Building on this strong execution, the next major development in our furnace roadmap is a batch atomic layer depletion or ALD process. We view this as the most challenging and promising product for advanced manufacturing nodes for both memory and logic. We expect the furnace product cycle to ramp in 2022. Based on 2022 market data, we estimate our current products address a $5 billion total global market opportunity. We are committed to our goal to double our addressable market to $10 billion in the next several years. On that note, we are making steady progress with our R&D investment in 2 additional major new product categories. This is our long-term commitment to major adjacent markets in which our customers are pushing us to invest in product roadmap that support their advanced nodes. We have accelerated our hiring to support this program. We are confident that we can deliver the first tool in each category in the first half and second half of 2022, respectively. We have a deep R&D program intended to address the next 2 product generations by entering this category at the leading-edge nodes. We are in a strong strategic position to leverage our local relationships with some of the most advanced semiconductor fabs in the world, where we can test drive and develop our most advanced technology. This will help drive most of our product line to the leading edge and compete on a global basis. Next, I would like to recap the ACM customer base on Slide 5. Our first group includes our 5 major front-end customers that represent the foundry, 3D NAND and DRAM manufacturers. For 2021, we expect good growth from Huahong Group and YMTC, which we expect to remain as our top 2 customers. However, each may represent a lower percentage of total revenue as we anticipate meaningful growth from other customers. For 2021, we also expect a good contribution from our other 3 major front-end customers but now unlikely to be over 10% contributors. This includes SMIC, which contributed to our third quarter results as anticipated, SK Hynix and CXMT. Our second group includes a number of new China-based semiconductor customers who manufacture power, analog, CMOS image sensor, compound semiconductors and other devices. This customer includes 4 of 5 Tier 2 players, a handful of new Tier 3 and others. Each is relatively small, this group of new customers combined could contribute 10% or more to our 2021 revenue as the newer customers are investing in new capacity to support the growth of 5G, IoT, EV and AI and other emerging technologies. ACM has a good presence at these customers, supplying a broader range of tools, including SAPS, Semi-Critical cleaning, ECP and the furnace products. Our third group is advanced packaging and wafer manufacturing customers. Top customers here have included JCAP, Tongfu, Nepes and Wafer Works. We've had a good order momentum in this group this year, including orders from 2 new advanced packaging houses in Q1 and yesterday's announcement from the China-based packaging facility, a major global IDM. We expect additional orders from more potential customers in this group by year-end. Collectively, we expect tremendous growth from this group. That should drive our increased industrial focus on advanced packaging and wafer manufacturing, penetration of new customers, and a strong product cycle for ACM's ECP AP tools. Looking ahead, we believe our current customer base represents a significant opportunity for ACM. Most of these customers are still in early or middle stage of multi-year capacity expansion. We are committed to further broaden our customer base as we believe every major semiconductor manufacturer can benefit from our technologies. Moving on, I would now like to discuss Q3 shipments and provide an update on our manufacturing facility. Please turn to Slide 6. We delivered record total shipments of $99 million in the third quarter. Shipments were $32 million higher than revenue, the difference being first tools and evaluation tools pending customer acceptance for previously delivered first tools. This is a positive indicator as it reflects demand for new products and from new customers. To achieve this level of achievement, we must thank the production team in our Chuansha facility. We are ramping production capacity to meet the strong customer demand in a constrained supply chain environment. We started production in the second building of our Chuansha factory in Q3 as planned. We are on track with our capacity roadmap, which targets a full rate of $500 million of annualized production capacity by the end of this year, up from $350 million at the beginning of this year. We expect to further increase production capacity to $625 million by the end of 2022. We are committed to our long-term strategic plan to build a production and R&D center in the Lingang region of Shanghai. The 1 million square feet of floor space will enable us to increase our annual production capacity to $1.5 billion. The facility will also be used to support advanced R&D with state-of-the-art cleaning room and testing equipment. We recently began initial construction, laying the groundwork towards our plan for initial production in the beginning of 2023. Before I provide our 2021 outlook, I want to provide an update on ACM Shanghai's stock market IPO. Yesterday, the Shanghai Stock Exchange announced the pricing of the stock market IPO for shares of ACM operating subsidiary, ACM Shanghai. In the IPO, ACM Shanghai proposed to issue 43.4 million shares, which is 10% of the total shares outstanding following the IPO at the announced pricing of RMB 85 per share. This would represent gross proceeds of RMB 3.65 billion or approximately USD575 million at the current exchange rate. If all goes according to plan, we tentatively expect ACM Shanghai stock to begin trading on November 18, 2021. Please keep in mind that the timing and successful completion are subject to factors beyond ACM Shanghai's control. We are confident that the stock market listing of ACM Shanghai shares, combined with the NASDAQ listing of ACM Class A common share can provide a strong foundation to support our mission to become a major player in the global semiconductor industry. Now let's move to our 2021 outlook on Slide 8. Our guidance reflects optimism about our growth opportunity for 2021. We have tightened our revenue guidance to the range of $230 million to $240 million, representing 50% of our annual growth at the midpoint. Our outlook for 2021 is based on several key assumptions. First, stability regarding the global COVID-19 pandemic. Second, the stability in the U.S.-China trade situation. Third, a range of spending scenarios for the production ramps of key customers. Fourth, management of ACM supply chain. And finally, a range of timing of customer acceptance of our first tools. Our results and outlook demonstrate successful execution of our strategy. With a strong strategy, our strong growth is supporting additional R&D spending on new products. We are building our global sales and marketing resources to penetrate new customers in the region, and we are scaling production capacity to support our long-term growth plan. We believe we are on track to achieve our mission to become a major supplier to the global semiconductor industry. To conclude, I would like to thank our employees for their hard work and dedication. I also want to thank our customers, partners, and shareholders for their support and confidence in ACM Research. I will now turn the call over to Mark to discuss financial results in more detail. Mark, please?

Thank you, David. Good day, everyone. We delivered strong financial results in the third quarter. Unless I note otherwise, I will refer to non-GAAP financial measures, which excludes stock-based compensation and unrealized gains in trading securities. Reconciliation of these non-GAAP measures to comparable GAAP measures is included in our earnings release. Now the third quarter, shown on Slide 9. Revenue was $67.0 million, up 40.6%. Revenue for single-wafer cleaning tools, which includes SAPS, TEBO, Tahoe and Semi-Critical cleaning was $49.5 million, up 29.0% from $38.3 million. Revenue for ECP furnace and other technologies was $8.2 million, up 69.1% from $4.9 million. Revenue for advanced packaging, excluding ECP, services, and spares was $9.4 million, up 109.5% from $4.5 million in 2020. Total shipments were $99 million versus $59 million in the third quarter of 2020 and $82 million in the second quarter of 2021. This includes deliveries for revenue in the quarter, deliveries of shipments awaiting customer acceptance for potential revenue in future quarters, and deliveries of evaluation tools. This represents another quarter of record shipments, a great accomplishment by our production team given industry-wide supply constraints. Gross margin was 44.5% versus 42.8%. This was at the upper end of our normal expected range of 40% to 45% due to favorable product mix. We expect gross margin to continue to vary on a quarterly basis due to a variety of factors, including product mix and manufacturing utilization. Operating expenses were $16.7 million versus $10.1 million. The increase in operating expenses reflected higher R&D on new products, our expanded U.S. sales team, and other costs. R&D expenses grew by 82.2% to $7.6 million or 11.3% of sales versus $4.2 million or 8.7% of sales last year. The increased R&D intensity reflects ACM's commitment to new products and innovation. We expect to increase R&D spending in 2022. Operating income was $13.1 million, up from $10.3 million. Operating margin was 19.5% versus 21.6%. Unrealized loss on trading securities related to the change in market value for our SMIC investment was $1 million in the third quarter of 2021 versus an unrealized gain of $9 million in the year-ago quarter. Note that we exclude this non-cash item from our non-GAAP results. We had a tax benefit of $0.3 million versus a tax benefit of $1.7 million in the year-ago period. Net income attributable to ACM Research was $12.4 million versus $9.0 million in the year-ago period. Net income per diluted share was $0.56 compared to $0.42 in Q3 of 2020. Tax items and the effects of foreign exchange fluctuations on operating results provided a net benefit of $1.7 million or $0.08 per share in the third quarter of 2021 versus a net benefit of $0.3 million or $0.02 per share in the third quarter of 2020. I will now review selected balance sheet items. Our cash balance was $65 million at the end of the third quarter versus $70.2 million at the end of the second quarter. In addition to the cash balance, we also had trading securities of $3.2 million related to our SMIC investment. This includes a significant unrealized gain from our original purchase price. Total inventory was $176.6 million at quarter end, up from $136.9 million at the end of last quarter. The $39.7 million quarter-to-quarter increase was driven by 2 items. First, finished goods inventory grew by $17.9 million to $81.9 million. This represents the balance of first tools that have been delivered to customers and evaluation and are carried on our balance sheet at cost pending a potential transfer of ownership. The second item is work in process and raw materials, which in total grew by $21.8 million from the prior quarter. This was due to purchases to support future shipment growth. At quarter end, short-term borrowings, including the current portion of the long-term debt were $17.5 million, down from $24 million at the end of the second quarter. Non-current long-term borrowings were $23.1 million versus $18.7 million at the close of the second quarter. Cash flow used by operations was approximately $4 million for the third quarter. For 2021, capital spending is planned at approximately $10 million. This includes $5.5 million already spent through the first 9 months of the year. Our 2021 investments will be primarily focused on capacity increase at our Chuansha factories, investments to support our R&D programs, and initial spending on Lingang. In sum, we are successfully executing on our strategy. We are participating in the growth of major new IC fabs. We are ramping production, and we're developing and delivering new products to a growing list of customers. We're positive about our opportunities in China and expansion outside of China. We remain committed to achieving our mission to become a major player in the semiconductor equipment market. Now let's open the call for any questions that you may have. Operator, please go ahead.

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

Congratulations for the nice quarter and outlook. Actually, Mark, maybe to start off first with you, the supply chain. Based on your results, your outlook and the margin profile, it looks like you guys managed it very well. Can you discuss what problems you may have seen and how you mitigated the situation given the results and outlook?

Patrick, maybe I'll let David start on that and then I can add, but David can you...

We observed that the market is facing constraints, with spending on semiconductor equipment doubling compared to last year. Consequently, our components have also been affected by these constraints. We source some components from the U.S., Japan, and Europe, and the lead times are increasingly lengthy. For instance, parts that typically took two months are now taking four months, and some specialized parts are taking six months. Due to these delays, we had already made forecasts. Based on our sales projections, we’ll order long-lead items in advance. This is our current strategy. We are now using a rolling forecast for the next twelve months to assess potential delays and our vendors' supply statuses. We require our vendors to inform us of what they can deliver over the next year. We hope this will enhance our supply security. We were able to make significant progress in the third quarter, but compared to last year, our lead times have increased. We are optimistic as our key supplier has added five more staff and expanded their manufacturing capacity, and we anticipate improvements by the start of next year. Mark, do you have anything to add?

Yes. No, thanks, David. The only thing I'd add, Patrick, is it's not new to deal with the supply chain. I mean we've been dealing with the situations related to COVID and the global supply chain. And then, of course, the big recovery where the industry is building back semi-capacity pretty aggressively. But at our size, as a company, I think we've demonstrated some scale. It's really important that our customers are confident that we can deliver. And so we're sending that message. And I think our manufacturing and supply chain team did a good job in Q3, and we anticipate that as well in Q4.

Great. That was really helpful. As my follow-up question, maybe for David, in terms of the advanced packaging market, you're showing some really nice growth there. The marketplace itself is growing. Can you give a little more color on the type of applications you're seeing today and how it may progress to say, next-generation techniques like heterogeneous integration? What are you seeing today? And what are some of the opportunities, say, over the next couple of years?

We have established a strong product portfolio for advanced packaging tools, including wet process cleaning, coating, developing, PR stripping, and especially copper plating tools. There is significant growth in this area, and demand for our copper plating tools is particularly high. Our copper plating offers advantages over competitors, such as better etch control and higher plating rates due to a specially designed plating chamber. This indicates robust potential for revenue growth in the semiconductor sector this year and into next year. Additionally, we see interest in our plating tools from customers outside Mainland China, and we aim to enter the Taiwan market next year. We've also gained new customers in China, alongside our longstanding top two customers, JCAP and Tongfu. Overall, we have a positive outlook for growth in advanced packaging tools.

Thanks, Patrick.

Your next question from Charlie Chan from Morgan Stanley.

First of all, congratulations on your impressive results from the China IPO. My first question is whether the component shortage will affect your ability to increase shipments. Given that you delivered strong growth this year, do you anticipate an even higher growth rate for 2022? Any preliminary insights?

Okay. Yes. Actually, you look at our shipment, in Q2, almost double. I mean, 80% and our Q3 shipment also a 60% increase too. So our total shipments compared to last year have been increased a lot, and at the end of this quarter, I can give you more detail on how much percentage increase. It's much, much more than the previous year. So we'll say, we think we will continue to look strong in our forecast pipeline. So in other words, we have the real increase more of the components and borrowing from our supplier. So in other words, we are reworking closely with our key supplier and as I said, we've given a rolling 12-month forecast plan, and they can tell us what is delivered and what is the capacity they can build for us. So we're working on that, and I really hope next year gets better. But again, we're still very carefully watching the market and also working closely with the supply chain. It's an ongoing process, we got to be careful also to manage this supply chain.

Okay. And I'm not sure if you think about this, but previously, you mentioned you have two new product lines to launch, right? Can you update the status right now?

You're talking about new products or the existing products.

He is asking about the newer, the two new products, yes.

I understand. Well, let me clarify. Two years ago, we began the launch of two new products. Unfortunately, I cannot disclose the names of these products yet. However, we believe they hold significant potential in the global market and service sector. We also recognize that both products present challenges and require technological innovation. Currently, we are collaborating closely with our R&D team. I expect that one product will be ready in the first half of next year, and we're also engaging with customers to enhance our testing applications. For the second product, we are aiming for a launch in the second half of next year. With our dedicated team, we are hopeful that both products will be delivered on schedule.

Okay. Since we are on track, my next question is for Mark. Let's discuss the China IPO. I'm uncertain about the pricing and the implications of any potential variations. What would that mean for your U.S. market capitalization?

Yes, Charlie, we provided a lot of information about the pricing, the number of shares, and the proceeds, which amount to RMB 3.685 billion or USD 575 million. Regarding the valuation, you can analyze our figures to understand that. I'm not certain how this will impact our U.S. market capitalization, but after the offering, we noted that we would retain 82.5% ownership of the subsidiary.

I thought that it's a big catalyst, given what's kind of an overhang, right? So hopefully your market cap can continue to expand. That's all from me.

Thanks, Charlie.

Next question from Ken Bolton from Needham & Co.

David and Mark, I offer my congratulations on the stock market IPO as well as the international customer expansion. I wanted to start with the international customer expansion. It sounds like the 3 customers you're working with or that you recently announced are all taking tools for delivery to their China manufacturing facilities. I'm wondering if you can give us your thoughts that as you first penetrate their China manufacturing facilities, what's the opportunity to begin to place and deliver tools to international.

Quinn, we lost your words. Mark, can you hear Quinn?

Yes. No, David, I can hear Quinn okay. I can repeat the question. Can you hear us, David?

Yes, Mark, I can hear you coming through.

Yes, you're coming through okay, Quinn. I don't hear David. Can you hear me now? So Quinn, I can take that question while we wait for David to come back. But I think your question was about the new customer announcements. I think we mentioned that 2 of those were for deliveries to the China fab. Another one was an Asia-based one. And so can you maybe, Quinn, just to clarify your question again?

Yes. I guess maybe I misunderstood. I thought all 3 were delivery, smart tool deliveries taking place in China and was asking what's the progression, the company's opportunity to first deliver tools to China facilities, but then to expand to other manufacturing facilities at those customers around the world.

Got it. Yes, it's a great question for David. But I think you know we've got a global sales force. And so these are the 3 that we announced here recently, but we still feel pretty positive about our opportunity for customer deployments outside of Mainland China. I think, as David noted, our longer-term goal is to have half of our business out of China outside of Mainland China. So we've got activities that we think can result in that in the coming years.

Got it. Just to clarify, did you mention that one of the customers was taking delivery outside of China, in another part of Asia?

We discussed three recent orders: an SAPS evaluation order from a global semiconductor manufacturer with a development facility in China, two stripper orders for global IDMs' packaging facility in China, and the ECP evaluation order, which we noted was from a regional semiconductor manufacturer in Asia, though we did not specify the destination for that tool.

Got it. The second question, David discussed the growth in the advanced packaging business. I'm curious if you could provide your perspective on how much of the business in 2022 might derive from that broader advanced packaging application.

Yes, absolutely. So Quinn, we provided the mix for Q3 and year-to-date. It was approximately 74% for front-end products and 26% for back-end products. Apologies for the technical difficulties; it seems the team in Shanghai is trying to reconnect. For now, Quinn, we plan to maintain a similar mix. It's challenging to predict where the growth will come from in 2022, but we'll share more details during our Q4 call. We do not expect a significant shift between these two groups.

Next question from Suji Desilva from ROTH Capital.

Mark, I don't know if David is back on, but congratulations on the progress here. I want to know that the TEBO products have been available since the IPO. David started discussing it more in this call. Is the opportunity for growth with TEBO potentially about to change? What does the pace of TEBO's growth look like compared to SAPS?

Got it. Yes, great. And Suji, we're trying to get...

I got back now. Can you hear me okay?

David, can you hear me? A - Mark McKechnie That's great. Hey, David. David, it's Suji. Can you hear me?

Yes, very well.

Great. Okay, David. So I'll repeat the question. So I said in this call, you guys talked about the TEBO product more, you had the IPO. I'm curious, is there an inflection ahead for the TEBO product? What's the opportunity there? What are the factors of puts and takes of that growth versus SAPS, which has done very well for the last few years?

We have made progress with the TEBO product, which has been integrated with advanced drying technology. About a year ago, we began developing two types of advanced drying technologies. One method is a hot IPA multi-zone PD technique, and the other is supercritical CO2. I expect that one of these new drying technologies will be available in Q1 next year, with the other following in Q2. This combined technology, along with TEBO, will expand its applications significantly. For instance, the 70 nano DRAM structures require CO2 drying due to the new effects, and similarly, the 40 nano semi-fab structures benefit from the high aspect ratio of the hot IP drying method. With the addition of these drying technologies to the TEBO product, we will see enhanced applications in advanced manufacturing, including logic memory.

Okay. All right. And Quinn just asked a question, I want to maybe rephrase and ask it, make sure we get your answer. The new customers seem to be shipping primarily into China and the region with one maybe in Asia. And we're excited about the global customers. You talked about 50% of the business coming from outside of China longer term. Can you talk about what it would take for these customers to start putting your tools in outside of China and why maybe the dominant initial push is in the China facility, just to understand that dynamic.

Yes. Actually, no, obviously, the tools we ship into the China facility or China fab, right, their fab. It's a good starting point. This way our process capability can validate their fab in China, is obviously potential, I call it getting to their fab outside of Mainland China, and so that's what we're looking for. So I think it's really a good sign and also a good starting point. And those data come out in China, we are driving force to their mother fab or their facility outside of Mainland China.

Next question from Mark Miller from Benchmark.

Congratulations on the quarter. We're noticing significant fluctuations in margins, which I believe are due to the product mix. You mentioned that the mix is expected to be 75% front end and 25% back end. For the upcoming quarter, will the mix be similar to what we saw in the third quarter?

Yes, David, do you want to answer that? Or it should I can take that too.

I can give a little bit of light there. This is normal gross margin is a flat rate. We said between 40% and 45%. And there are higher margin tools. I give you a single wafer, SAPS tool normally gives a high margin. And certain, I call it copper plating and also give margins for front end. And then there's also low-margin tools, right? And the certain, I call it a wet process tool and advanced packaging side too. So I mean this is a good combination. And also, depends on the combination that margin may be changing. I could give you a precise number and probably I think within the range of 40%, 45%.

Okay. But for the next quarter, does it look like a similar mix to the third quarter?

I cannot provide a specific number by customer, and this will take a long time. So it is still around 25%.

Okay. You're breaking up at least on my side. Just wondering, you've been primarily more DRAM. NAND is supposed to come on stronger next year. Do you see opportunities, more opportunities for yourself in NAND?

I cannot provide a specific number by customer, and this situation will persist for a long time.

David, you're having some connectivity issues, so I'll address the question. Mark, just to clarify, if we examine our customer base and how we reported on our NAND business, YMTC is our largest NAND customer. They accounted for about 30% last year. I believe your understanding is correct; we have a solid mix in NAND, and of course, SK Hynix and CXMT are our DRAM customers. We still anticipate strong content from both our 3D-NAND and DRAM customers.

Next question from Emma Keane from Hongdae.

Congrats first of all, on the release of Q3. This is Emma from Hongdae. My questions are probably more for David as well. But Mark, you're welcome to share your thoughts. I'm not sure if David is back on line. Probably not yet.

Yes. I'm here. Can you hear me okay?

That's great. Yes, I can hear you. My first question is related to Quinn's question as well. I wanted to ask for more details about your long-term plans for expanding in the global market. We know that all three ACMR factories are located in Mainland China, close to Shanghai, if I remember correctly. Is there a specific reason for this? Do you have plans to build any additional factories, possibly in Beijing or even outside of Mainland China or Asia?

Okay. Let me give you the answer, and we are finishing the market, IPO, like a more strong financial foundation.

Sorry, David, you're still breaking up quite a lot. Or is it just me, I'm not sure.

Can you hear now better?

We currently have a manufacturing center in Korea and are planning to build additional centers near major customers in China, including Beijing and Wuhan, as well as potentially other locations. These R&D centers will provide close support for our clients. Furthermore, we are exploring opportunities in other regions and countries as our business expands outside of China, including Taiwan, the U.S., and Europe. We have plans to establish additional R&D support centers, as we believe that having R&D close to our customers will enhance our responsiveness and support capabilities. Additionally, if we identify strong talent in the local markets, we may consider mergers and acquisitions to strengthen our local R&D capabilities. Our long-term strategy involves diversifying our global R&D efforts, aiming for 50% of our sales to come from outside Mainland China and 50% from within. We believe our differentiated technology will be a significant driving force in achieving this goal. Our tools, including TEBO and Tahoe, are set for global sales, and as we develop new technologies, we will validate them in the Chinese market before introducing them to the global market. We've also noticed advancements in some Chinese fabs, which will allow us to validate our tools with advanced technology nodes. Overall, the technology validation in our local market will facilitate our entry into markets beyond China. All the best for that.

Mark, anything you want to add on that?

Yes. Nothing to add. I think we are kind of at the end of our call here. So I think we need to wrap up. Operator, if you can, please wrap up the call.

Thank you so much. That does conclude our conference for today. Thank you for participating. You may all disconnect.