Good day, ladies and gentlemen. Thank you for standing by. Welcome to the ACM Research Third Quarter 2022 Earnings Conference Call. Currently, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, we 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.

Thanks, Lisa, and good morning, everyone. Thank you for joining us on today's call to discuss third quarter 2022 results. We released results before the U.S. market opened today. The release is available on our website, as well as through Newswire Services. There's also a supplemental slide deck posted to the investor portion of our website that we'll reference during our prepared remarks. On the call with me today are our CEO, Dr. David 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 the remarks made during this call may include predictions, estimates, and other information that might be considered forward-looking. These forward-looking statements represent ACM's current judgment for the future; however, they are subject to risks and uncertainties that could cause actual results to differ materially. Those risks are described under Risk Factors and elsewhere in ACM's filings with the Securities and Exchange Commission. Please do not place undue reliance on these forward-looking statements, which reflect ACM's opinions only as of the date of this call. ACM is not obliged to update you on any revisions to these forward-looking statements. Certain of the financial results that we provide on this call will be on a non-GAAP basis, which excludes stock-based compensation and an unrealized gain or loss in trading securities. For our GAAP results and reconciliations between GAAP and non-GAAP amounts, you should refer to our earnings release, which is posted on the IR section of our website and Slide 12 in the supplemental deck. With that, let me now turn the call over to David Wang, who will begin with Slide 3. David?

Thanks, Gary. Good afternoon, everyone, and welcome to ACM's third quarter 2022 earnings conference call. I will start with the new China trade restriction issued by the U.S. Department of Commerce Bureau of Industry and Security in October. The updated export controls cover equipment and parts subject to U.S. export controls, including items from U.S. sources and the activities of U.S. persons. Based on our preliminary assessment, the new policy restricts U.S. parts exports for tools delivered to advanced node facilities or for tools that meet certain ECCN parameters. Some of our shipments will be impacted as our tools currently have 5% to 10% of the components sourced from the U.S. and reproduce some tools in certain ECCN categories. Let me provide more detail. First, some of our customers have advanced node facilities. Shipments to these facilities may be impacted due to U.S. export restrictions. The advanced node facility is defined as one where production and their restricted technology level occur. The policy does not apply to other customer PODs with mature nodes, even when they are on the same campus. Second, products from ACM Shanghai need a parameter of a certain export control classification number or ECCN number on the commerce control list. Shipments of these tools may also be impacted if those tools need parts from the U.S. This may include our ECP tools that specifically support copper metal printing. Server-first product and one of the new platform products that we plan to introduce. It does not include our cleaning tools, most of our ECP tools, or WLP tools, or other new platform products we plan to introduce. Third, the policy is strict for U.S. processes in facilitating shipments and servicing products involved with advanced nodes or at least the new ECCN number. We have no U.S. employees in our Shanghai and Korea R&D teams. Therefore, the impact from the new U.S. person policy is minimal. We have, however, implemented compliance protocols concerning U.S. persons' enrollment in facilitation, shipment, and services supporting activities. We believe the new policy will not impact shipments of ACM Shanghai tools that do not have U.S. parts or do not include the restricted activities of U.S. persons. We believe that ACM Shanghai tools that are not in the restricted ECCN category can be shipped to mature nodes, even with U.S. parts and U.S. person enrollment. I will now move on to third quarter highlights. Our third quarter results were record for the company. Revenue was $134 million, up nearly 100% driven by our flagship cleaning tools and strong growth from our new ECP and furnace products with TEBO. Shipments were $163 million compared to $99 million last year. Gross margin was 49.3%. GAAP operating margin was 23.7% and non-GAAP operating margin was 25.1%. We ended the quarter with $473.2 million in cash, equivalents, restricted cash, and time deposits. From the first nine months of 2022, revenue grew 70% contributed to growth of 56%, ECP, and the furnace tool grew 316% and contributed to 20% of our sales. We had three 10% customers, which together accounted for over 50% of our sales versus a 66% mix for the same period last year. We made good progress with our initiatives and a major semiconductor manufacturer outside Mainland China. The evaluation of two cleaning tools and the U.S. factory of a large U.S.-based manufacturer is going well. We are gaining traction with potential new customers in Europe and other regions. In Q3, we launched our first ARD furnace product. ARD is one of the faster-growing applications for manufacturing at advanced nodes in memory and logic, making it a critical new capability for our furnace portfolio. We delivered our evaluation tool to a top-tier China-based foundry manufacturer and targeted qualification in 2023. This is the first in a series of our furnace ARD tools with a product line extension ahead. We expect our first ARD product to make a good contribution starting next year, with ARD technology expected to represent about half of the total furnace market. Furnace ARD offers significantly higher throughput than traditional single-wafer ARD tools and presents a compelling value proposition. We believe that ACM’s ARD furnace with proprietary technology can narrow the performance gap between furnace ARD and single-wafer ARD. Next, we plan to grow our operations with investment in new facilities. Construction of our Lingang production and R&D center is in full gear and remains on track for initial production in the middle of 2023. I also want to announce we are close to purchasing a new headquarters in ZhangJiang, Shanghai, the city and valley of China. We're committed to the China market and this new headquarters will provide stability for employees and help us attract new talent. We are also in the final stage of selecting a site to expand our R&D and production facility in South Korea. Lastly, we are on track to double our addressable market opportunity with upcoming introductions of two new product categories planned for later this year. Now I want to provide more thoughts on the impact of future business from the new U.S. restrictions. We expect a temporary pause as some customers in the industry adjust to the new policy. ACM Shanghai is committed to complying with new regulations and meeting the demands of its customer base. We are actively managing our supply chain to source compliant components to ensure maximum shipment of our tools. For mature nodes, we expect a fairly quick recovery. Most of our business has been for 28-nano and above logic devices, 96-layer or less 3D NAND, and 90-nano and above DRAM. Looking forward, we expect our China customers to continue at or even speed up capacity for mature nodes. This is because mature nodes made in China are much lower than China's market consumption, and we are strongly positioned to participate in this opportunity. For advanced nodes, we remain committed to participating in that market in full compliance with the new U.S. export controls. ACM is focusing more effort to bring its advanced technology to leading-edge fabs for global customers. We are making good progress with U.S. customers and expanding our global sales and support teams. We are also accelerating our R&D and production facility in South Korea to be close to several major semiconductor players and provide a second site to support worldwide customers. I will now provide our outlook. As a result of the new U.S. trade policy and supply chain constraints, we have lowered the upper end of our full-year revenue outlook. We now expect 2022 revenue in a range of $365 million to $385 million versus the previous range of $365 million and $405 million. The range of the company's 2022 outlook reflects, among other things, the impact from the new U.S. trade policy, supply chain constraints, variations in spending scenarios for the production ramp-up of key customers, and timing of our acceptance of first tools on the evaluation field while assuming stability with respect to the COVID-19 pandemic in China. Now let me turn the call over to our CFO, Mark, who will reveal details of our third-quarter results.

Thank you, David, and good day, everyone. Please turn to Slide 5. Unless I note otherwise, I'll refer to non-GAAP financial measures, which excludes stock-based compensation and unrealized loss on trading securities. A reconciliation of these non-GAAP measures to comparable GAAP measures is included in our earnings release. I'll now provide financial highlights for the third quarter. Revenue was $133.7 million, up 99.5%. Total shipments were $163 million versus $99 million in the year-ago period. Revenue for single-wafer cleaning tools, which includes SAPs, TEBO, Tahoe, and Semi-Critical cleaning, was $99.7 million versus $49.5 million. Revenue for ECP, furnace, and other technologies was $24.5 million versus $8.2 million. Revenue for advanced packaging, excluding ECP, services, and spares was $9.5 million versus $9.4 million. Gross margin was 49.4%, up from 44.5% in the prior year. This exceeded our normal expected range of 40% to 45%. The increased gross margin versus the prior year period was primarily due to a higher mix of ECP, front-end packaging, furnace, and other technologies and a positive impact due to a change in the renminbi to U.S. dollar currency exchange rate. We expect gross margin to continue to vary from period to period due to a variety of factors such as sales volume, product mix, and currency impacts. Operating expenses were $32.6 million versus $16.7 million. Higher R&D due to tools built for product development, additional engineers, and other factors together with higher sales and marketing due to promotional tools and personnel costs contributed to the growth versus the prior year period. Operating income was $33.5 million versus operating income of $13.1 million. The large increase was due to higher gross margin and leverage in our top line. Operating margin was 25.1% compared to 19.5%. Unrealized loss on trading securities was $5.3 million. The loss reflects the change in market value of the shares of SMIC, which are owned by ACM Shanghai. The value is marked to market quarterly and is excluded from the non-GAAP results. Realized gain from the sale of trading securities was $1.1 million due to the sale of a portion of SMIC shares, which generated net proceeds of $4.5 million. Other income expense net was $7.2 million. This reflects $6.4 million due to gains recognized from the impact of exchange rates on foreign currency denominated working capital transactions versus $0.3 million in the year-ago period. Income tax expense was $10.5 million compared to a benefit of $0.3 million in the year-ago period. The effective tax rate for 2022 has increased primarily due to a new requirement to capitalize and amortize previously deductible research and experimental expenses under IRS code 174, which became effective on January 1, 2022. The company's tax provision for the nine months ended September 30, 2022 assumes the rule will not be overturned and is based on capitalization of all R&D expenses for tax purposes. Net income attributable to ACM Research was $28.2 million versus net income of $12.4 million in the year-ago period. Net income per diluted share was $0.42 compared to net income per diluted share of $0.19 in Q3 of 2021. I will now review selected balance sheet items. Cash, cash equivalents, restricted cash, and time deposits were $473.2 million at the end of the third quarter versus $468.9 million at the end of the second quarter. Total inventory was $327.8 million at quarter end, up from $288.1 million at the end of the last quarter. This included finished goods inventory of $109.2 million, working processes of $3.5 million, and raw materials of $145.1 million. Net cash used in operations was $2.2 million. CapEx was $13.2 million due to construction in Lingang and other facilities. For the full year, we plan to spend $30 million to $35 million in total CapEx for Lingang and other facilities. There may be additional CapEx in the fourth quarter should we close on our new headquarters in ZhangJiang. That concludes our prepared remarks. Now let's open the call for any questions that you may have. Operator, please go ahead.

Thank you. At this time, the first question will be coming from Quinn Bolton of Needham and Company. Your line is open.

Hey, David and Mark. Congratulations on the strong near-term shipments. A key concern for many of us on the call is the impact of the export controls, which seems to be influencing the fourth quarter as you adjust your 2022 guidance downward. I have a couple of questions. First, regarding 2023, although you haven't provided guidance, could you share an estimate of how the new export controls might affect revenue next year? Could it be around $50 million or $100 million in potential business at risk? Secondly, could you clarify the percentage of revenue impacted by shipments to advanced facilities in China, specifically for DRAM and the 128-layer NAND, compared to the impact stemming from tools that include U.S. parts or new tools affected by ECCN classifications? I apologize for the lengthy questions, but I hope you understand the direction I'm coming from.

Okay. Well, let me cover the first one and maybe Mark can handle it, right? I mean, our revenue projection for next year typically goes out in January. At this moment, I think it's still too early for us to give too much detail at this moment. I want to mention there that looking at this restriction, actually, I can say that definitely some advanced nodes production plans will probably get slowed down. However, as I mentioned in the script, China has a lot of mature nodes and has significant chip consumption in the market. China imports almost 60% of global chips. So for these mature nodes, I think what we see is potential growth, and also a lot of the electric cars and other commercial products are using the 28-nano and 45-nano processes, right? So we see that the demand will continue to grow and may even speed up, and there’s potential for fab build-up. So also our technology is mainly focused on mature nodes, and we are well-positioned in this market. I would say ACM is still on a growing pace in this channel market, right? That's my view of the market that we're talking about. Then, at the same time, we have to also increase our two new products in line, which are probably going to be introduced very soon, toward the end of this year. So with new product additions to our product portfolio, we will also have additional revenue streams in 2024. And also, we recently announced the ARD furnace product that's also going to contribute to our revenue in 2023 and beyond. So my key confidence comes from our strong position in the Chinese market, as we have a very high record of R&D engineers and also a strong collaboration with our Korean engineers. We are fully prepared to serve the mature nodes and are also exploring opportunities for advanced nodes on an international scale, right? So for that reason, I would say we can continue on the R&D side to service global customers and we aim to provide differentiated products and services to the entire industry. Did I give you the answer to the first question? Okay, Mark, do you want to cover the second question or do you want to add anything to that?

Thanks, David. I think Quinn's second question was about the percentage of our tools that are going into advanced nodes. It's tough to quantify, but it's a relatively small percentage. The majority of our business has been focused on the more mature nodes. However, ACM is in a strong position as we have the flexibility to deliver many products that others cannot. We will be influenced by our customers' overall spending. For example, if they are unable to obtain certain tools from other suppliers, we would expect their spending to stall for a period, as David mentioned in the prepared remarks. To summarize, looking towards 2023, although we won't provide guidance until early in the year, we are planning for some growth. We anticipate a pause in the first half of the year as the industry adjusts and secures their licenses. This pause could be due to customers working on fabs that are currently being built that do not include mature nodes, allowing them to have what’s recognized as a compliant fab. We are observing this closely, but we expect larger customers to experience some delays, with portions affecting this quarter and extending into the first half of the year. Nonetheless, as David pointed out, we foresee spending and industry support for mature nodes improving as we progress through next year.

Great. And just as a follow-on. Okay. Go ahead.

Let me add to our U.S. parts ratio. We are proud that we typically have a 5% to 10% U.S. components. Clearly, if our compliant product is not in the ECCN category, we can still utilize U.S. parts and U.S. personnel to work with mature node customers. Our Chinese engineers and staff are overseeing activities to build tools for advanced nodes. Currently, we cannot source any parts from the U.S., so we may have to select compliant suppliers from other regions. We have identified some locally sourced parts in China. This process will take time, possibly a year or two, depending on how quickly vendors and common suppliers respond to these changes. The impact of U.S. parts has been minimized, but we will return to it.

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

Yes. Actually, like you said, this is the copper plating cobalt, right. At this moment, I do not expect higher revenue in China, obviously. So a lot of like 20-nano and above, those nodes are copper plating, right? Even in the 60-nano and 40-nano areas is still copper plating. So I should say our copper plating is still okay, another ECCN. And all can be not in there, right? Our new product we can introduce does fall in ECCN, right? So in this case, we have really sorted the other U.S. parts out. And as I said again, even in our new product, we talk about ECCN, our U.S. parts probably, I would say, probably in the 10% range, right? Almost like that. So it still can be possibly sourced in other terms of choice. And obviously, either qualification needed to be done and working with the vendor and gather those terms to be qualified, right? It will take time, and however, we think we can manage it.

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

Yes. Thanks, Quinn.

Thanks, Quinn.

Thank you. Our next question will come from Suji Desilva of ROTH Capital. Your line is open.

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

Okay. Good. Actually, we started our Korean subsidiary in 2017, right? Since then, we’ve been hiring and today we have almost 110 employees in Korea, of which 60% are in R&D. Korea has about 3,000 square meters of facility. We can manufacture well-defined tools, and in the future, we can also manufacture copper plating tools, as well as dryers and the furnace, right ARD tool. Most of these portions will also be made in Korea and some will be made in China. As time goes on, we do have our two new introduced products, and I have not given them yet, but those two new products can also be manufactured in Korea. So I think the Korean R&D manufacturing base is well prepared, and we’re also finding a location in the final phase for government licensing. We’re also building another secondary manufacturing center in Korea, right? So with this preparation, I think we are well-positioned with Korea to manufacture tools, of course, that can be sold back to China, as well as to the Taiwan and U.S. or European markets. At this moment, I think we have our two manufacturing vendors, one in China and one in Korea, and we also have more products in our efforts to work with the top players in Korea and their customers here and to do R&D research and advanced nodes, right? So that’s going to be the real second center for expanding our global market. Mark, anything you want to add on that?

No. I think you hit it there. I mean, I guess maybe I’d mentioned that just having a second production center is pretty attractive to some of our international customers and so that’ll help us drive our international business.

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

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

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

Thank you, Suji.

Thank you. Our final question will be coming from Christian Schwab of Craig-Hallum. Please go ahead.

Hey. Good afternoon or good morning. Mark, can you tell us where all the cash is and how it is being used? Is there a way to bring some of that back to the United States? Can we consider a meaningful stock buyback or a program? Please refresh us on the significant cash balance.

Sure. Hey, David. Christian has a question. Go ahead, Christian.

It covers something, maybe you can stay away with cash, right. Okay. Well, basically, the cash we have in most are well-procured. We have some market IPO from last year, right? And that money belongs to the subsidiary, and you do have other tempered 17.5% of minority invested there. So we cannot directly put this cash back to their major shareholder in the USA, right? So we cannot do that. However, over time, we have profit generating in China and we can bring some dividends back to the U.S. Last year, we didn’t do anything, but we are still considering this option and putting cash back to the U.S. Not necessarily we want to buyback shares; it is really important when we’re trying to enhance our R&D and also sales efforts to explore further in the U.S. and European market. And that’s what we will consider. Anything else? Mark, you want to add on that?

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

Great. Those are my questions. Thanks, guys.

Thank you.

Thank you. Our next question will be from Robert of Blue Lotus. Please go ahead.

Hi, David. Can you hear me?

Yes.

Yeah. Hey, Robert.

Okay. Great. Yeah. Thanks for taking my question, and yeah, congratulations on the good results. I just want to get some clarification on the percentage of U.S. parts in your different types of equipment. Would you be able to clarify that? Like, for example, what percentage of U.S. parts are in your wafer-cleaning tools and in other tools? Thanks.

Yeah. Typically, I said that we did 5% to 10% depending on their cleaning tool type. We do have some critical components and some kind of pumps, right. And those parts are purchased from the U.S. So it's about 5% to 10% in terms of the brand-wise.

Okay, I understand. Do these parts need licenses, or is that what I'm getting? Is that correct?

Yes. Well, there's actually two categories, right? Our tool is not in the ECCN list, which means it's not ECCN related. And also, we are shipping mature node customer facilities. Therefore, for those portions of the tool, we do not need to apply for licenses, okay? So only the tools that need the license are for advanced nodes and also some tools within the ECCN number, which includes copper cobalt plating and also some furnace ARD tool.

Got it. All right. So you're saying, for the wafer-cleaning tools, the parts, there's no license necessary even if they come from the U.S. So for example, your supplier doesn't need to get a license if they want to ship you the part. Is that correct?

Yeah, for mature nodes to make sure…

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

Did that clearly answer your question, Robert? Hello, Robert? Oh, he is gone.

I think we lost Robert. Yeah.

He is gone.

We have another question coming in from Robert McKay of Blue Lotus.

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

So you asked about the impact in the U.S. or impact in China? I want to clear your question.

I was wondering if having your headquarters in the U.S. affects your compliance with the BIS rules. Does it subject you to additional regulations because of being based in the U.S.?

Okay. Well, that's a good question. At this moment, our U.S. headquarters are primarily conducting sales and marketing for the tools in the U.S. and Europe, right? And so for those activities, they are promoting our tools made in China or made in Korea. So for the USA or for the European market, I would say there would be no impact because the regulations are only for tools going to China, right? So I don’t think that impacts anything outside of our China activity.

I understand your question about the ECP tool. It's specifically for cobalt plating. The other ECP tools you've shipped, such as those for wafer cleaning, do not have license requirements if they are for processes that do not involve cobalt ECP or are not aimed at under 28-nanometer technology. Is that correct?

That's correct, yes.

Okay. Great.

Yeah. You are correct.

Okay. Got it. And then for furnace, I think it also applies to furnace. Does that mean the furnace then going forward there would be no revenue stream for furnace? Because I think from your remarks… Yeah. Go ahead.

Yes, the revenue from the furnace ARD is not easily visible. For those parts and tools, we likely cannot import any parts from the U.S. Additionally, a U.S. person cannot be directly involved in servicing or shipping. Therefore, we assign all responsibilities related to sales and marketing to our Chinese team, which includes a CEO, a sales VP, and operations personnel. They manage everything independently, using non-U.S. parts, as no U.S. personnel can be involved.

Got it. Okay. Fair enough. And then so for that corners tool, is there any Chinese suppliers that could supply the parts that you need for that tool? So I think domestically or would that be against the regulation?

Yes. It's a good question. Actually, the deposit can be using or where we are using maybe other countries. Some parts we can say from Europe, right, and some parts from Korea, and some are from Japan. We can also source some parts from China too, right? So we need some kind of qualification to qualify those parts. We take time for that.

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

I should say, we're still evaluating that right now and we do see some parts can be changing quickly. And some parts we have to rework with the supplier then to qualify the parts and also work with the customer to qualify that tool, right? So that ever take time and now they just like, you know, one day is reaching, right. But then, normally, our qualification process, I should say, if we change the path, and six months or one year, that’s a typical time you need to qualify, right? That’s the typical timeframe to consider to qualify new parts.

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

Thanks, Robert.

Thank you.

Thank you. We have our next question coming from Chaolien Tseng at Credit Suisse. Please hold for a moment while we open your line.

Do you hear me?

Yeah. We can hear you.

Thank you, Mark. My first question is about the market potential in China, particularly regarding NAND and 90-nanometer DRAM. Do you anticipate that Chinese fab customers will continue to expand in the coming years? There are concerns about potential construction issues for these NAND and DRAM products, leading to worries that these Chinese customers may not sustain good growth over the next one to three years.

Well, obviously there is a moment, we're still assessing their market, right. It's too early to give any conclusion right now. I would say 90-nano DRAM, above that, there are a lot of niche markets in the DRAM business. They're not only getting to their smaller dimensions, and some DRAM still sell 25-nano, or that niche market there. So I don't know; I just kind of speak of a customer, but I won't see that DRAM does have another application in large nodes, right? And for 3D NAND, I don’t know really at this moment; I cannot comment in the 96-layer, as any other application. We don’t know yet really. Sorry, I cannot comment?

Thank you, David. I have a question regarding the past few months since the lockdown in Shanghai ended. On the product development and R&D front, do you believe the progress has exceeded expectations over the last two quarters, or is it still lagging in terms of new product development? Additionally, could you provide more insights on our advancements in wafer-cleaning technology? Thank you.

Okay. Well, new product and I think we are coming for almost like a two or three year in all the effort, right? The two new product, new category product, which is a real trouble our addressable market. It's real good progress. But it’s like we’re in a final stage in capacity and also do there; I call it, pretty much we want to make sure our testing is okay, and meet the customer requirements before we ship. I still think we're possibly shipping by the end of this year, as new products for the customers. And regarding the CO2 dry clean product, I think we’re doing also very well, right? This is a critical product for other high-spec ratio drying process, and our Chinese engineers are working very hard to bring this market progress.

Thank you. I have a question about gross margin, as I missed the beginning. I'm not sure if you or Mark have already talked about the gross margin for ECP and furnace in comparison to the corporate average, but the gross margin for the second quarter looks quite good. I'm wondering if there's a chance that our gross margin could trend towards the higher end of our long-term range moving forward. Thank you.

Well, I still want to say that our gross margin is still in the range of 40% to 45%, right. And last quarter is again the combination tool, right? And you're right, our copper plating for front-end application does have higher margins, right, which is driving it. Also, we do have a strong combination of the cleaning tools to have also higher margins, right? So it really depends on the ratio. And there are also some low-margin tools, like in a double AOP tool, right? And also, auto bench tools, right? So it's really dependent combination. So I still say our margin stays in the 40% to 45% range for the near future.

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

Thank you.

The next question will be coming from Charlie Chan of Morgan Stanley. Your line is open.

Thank you. Hi, David. Hi, Mark. First of all, thanks for walking us through. Yes, this is a very challenging environment, and thanks for all the clarifications. So my first question is really about the cyclical impact. I know China still needs to be able to lower cost efficiency, right? But if you look at outside of China, essentially all the foundry fabs, memory fabs are cutting CapEx, by at least 20% into next year. Do you think that is going to impact your plan in mature nodes? And do you see any mature node customers withdrawing some CapEx plans recently? Thank you.

Yeah. Actually, Charlie, I really couldn't say, rare near future, right; I wouldn't say next quarter or two. But I just recall the high level point of view, as I said, China is still consuming a lot of mature nodes and products, right? And also recently electric cars even consume more of the power device. So a lot of our mature node products are still not enough or made in China, right? From that point of view, China is going to really increase more of its mature node production to meet their own requirements. So from that point of view, I still have a very positive view for the China market due to mature nodes. However, I cannot predict the near-term future, as in one quarter, two quarters, or three quarters, but from a long view, I believe there are a lot of fabs that we can do that. Plus, electrical car driving, right, is really high in development in China; that's a power device can be another bigger potential market we’re looking at right now.

I see. Yeah. I totally respect your view. But just there by, we did see this before, right, meaning CapEx long-term is still correlated with free cash flow. So from what we're seeing right now, there's just some wafer pricing pressures in mature nodes. So I'm really worried about free cash flow could decline, and that will at some point catch up the CapEx plan. But anyway, I do agree that long-term there is still upside for China as a mature node opportunity. And my second question is about your efforts or your entire supply chain efforts to minimize the dependency on U.S. parts. So, you do – you said that you want to qualify some U.S. components from Japan, Germany, or even China locally. But how do your customers complete the production line without the critical tools, by nanometer ASMLs tools or Applied Materials tools or Lam Research, ICP? Meaning, together, those companies or countries still want to comply with the U.S. rules. How do you still sell your tools if your customers can’t get critical products?

Okay. Let me clarify that. You mentioned for the advanced node or for mature node?

Advanced nodes, because for the mature nodes, I think it should be fine, right, nanometers from the export rule perspective or technology perspective, but your advance node is something that I'm asking?

We do expect a slowdown in mature nodes. Many of the essential components and tools are currently manufactured in the U.S., making it difficult to find suitable replacements in Japan or Europe. I agree with that assessment. Our primary emphasis is on mature nodes, but we also aim to expand into the international market for advanced nodes. ACM offers unique products, and we are eager to sell not only at 60-nano or 40-nano but also at 3-nano and 2-nano. Our strategy includes targeting markets outside of China for these advanced nodes to provide differentiated products and penetrate the global market.

I see that's very, very reasonable. So last question, maybe to Mark or David if you want to comment. Because right now, all the local equipment producers are more focused on the mature node opportunity. Do you expect more price competition from your local peers? And secondly, Mark, given the kind of a reduced revenue scale, but I believe you guys continue to spend R&D to launch the new product line. What would be a reasonable operating margin assumption for the coming years? Thank you.

Let me address the first question. You mentioned mature nodes, and I believe ACM is well-positioned in this area, especially given our strong technological foundation. We are not only engaging with our mature nodes but are also launching cleaning tools that can achieve nearly 90% output or more. Furthermore, we have introduced additional auto bench products for mature nodes, reinforcing our strong position in this segment. We are also developing new products that are expected to make a significant impact in the mature node market. Regarding local competitors, it's important to note that customers are seeking not just lower prices but also quality, especially since producing mature nodes can be challenging. For customers looking to scale up quickly, they often prefer a part or tool they can utilize immediately and typically qualify one vendor over others. There's a common misunderstanding that there are multiple suppliers for the same product, but this is not true for most advanced characterizations. Customers usually narrow their supplier options down to two or three. We feel confident in our position, our technology, our relationships with manufacturers, and our commitment. Our long-term relationships with customers in the region, lasting over 10 to 15 years, put us in a strong competitive position in China. Now, Mark, I'll let you take the second question.

Yeah. You bet. I think the question was about the operating margin kind of outlook. As you know, we've discussed this before; we believe there’s a lot of growth ahead of us. We certainly are still targeting that $1 billion revenue target over the longer terms. So we’re planning for growth. For next year, of course, David mentioned we’re not guiding for the year; we’ll share that on our Q4 call, but we're planning for growth. And in general, the operating margin depends largely on the overall top line. So, but we just did 25% here in Q3. It’s difficult to predict what the revenue level you will be looking at for the next year. We assume a floor of a 10% annual operating margin. With modest growth next year, that would be reasonable target; however, with good growth, we hope they would see some leverage.

So Mark, I'm not sure if I get it right. So you said with some moderate growth, you're still comfortable you can get that 10% operating margin over both next year. Is that right?

I'd call that a target. Yes, we’d call that a target. I mean, it depends; there are a lot of factors we'd assess in a given year but we generally have a kind of 10% annual operating margin target.

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

Okay. Thank you, Charlie.

Our next question will be coming from Mark Miller of Benchmark Company. Your line is open.

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

Certainly. There are some parts involved in our operations. We are purchasing parts from the U.S., and now we either ship them with our partners or have to explore other compliant sources. This has contributed to delays in our shipments. Additionally, we continue to face constraints with non-U.S. parts, which are significantly affected by supply chain controls. Together, these issues are impacting our revenue for the fourth quarter.

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

Furnace will be specific for ARD, right. It’s very dependent type, right? No, it's not all furnace.

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

Stock-based comp was $1.9 million for the quarter.

Yeah.

Thank you, Mark.

Thanks, Mark.

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