ACM Research, Inc. Q4 FY2022 Earnings Call

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the ACM Research Fourth 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. I would now like to hand the conference over to your speaker today, Gary Dvorchak, Managing Director of the Blueshirt Group. Please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining us on today's call to discuss fourth quarter 2022 results. We released results before the U.S. market opened today. The release is available on our website as well as from Newswire services. There's also a supplemental slide deck posted to the investor portion of our website that we will reference during our prepared remarks. On the call with me today are our CEO, Dr. David Wang; our CFO, Mark McKechnie, and Lisa Feng, the CFO of our operating subsidiary, ACM Shanghai. Before we continue, please turn to Slide 2. Let me remind you that remarks made during this call may include predictions, estimates or other 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 refer to Slide 12. With that, let me now turn the call over to David Wang, who will begin with Slide 3. David?

Thanks, Gary. Hello, everyone, and welcome to ACM Research's fourth quarter and fiscal year 2022 earnings conference call. In the fourth quarter, our revenue reached $108.5 million, up from $95.1 million last year. We achieved record shipments of $193 million, marking a 69% increase year-over-year. Our gross margin was 49.6%, and the non-GAAP operating margin was 17.7%. As we expected, several customers reduced production at their advanced nodes facilities due to U.S. export restrictions. Additionally, we faced delays from suppliers owing to supply chain constraints. Although these factors impacted our fourth quarter revenue, we are satisfied with our overall performance. For the entire year, 2022 was another step forward in our goal of being a significant supplier to the global semiconductor industry. We achieved a 50% year-over-year revenue growth despite challenges brought on by COVID-19 restrictions, supply chain issues, and new trade regulations. This growth can be attributed in part to our multi-product portfolio strategy. We are committed to strengthening our position in the cleaning segment of our core products. In 2022, our cleaning products grew by 44% to $272.9 million, driven by our single wafer cleaning tools and further expansion in semi-critical cleaning tools. We believe this segment will continue to be vital for mature node development in China. We successfully installed various important new cleaning tools, including viable edge tools, high-temperature single-wafer cleaning tools, and high-temperature dry tools for DRAM, which are crucial for our international initiatives. ACM now boasts one of the most extensive cleaning product portfolios, covering nearly 90% of all cleaning processes. Revenue from ECP and furnace technologies rose more than 100% year-over-year to $77.5 million, now accounting for 20% of our overall revenue. This growth largely resulted from increased uptake of our ECP cleaning tools at key customers for both front-end and back-end processes. We foresee a robust product cycle for our furnace products in 2023, including our higher temperature Anneal and LPCVD furnaces, with expansion to multiple clients. We have also broadened our furnace platform by introducing our thermal atomic layer separation, ARV, ultra FLA furnace tool. We delivered our first ALD tool to a customer in September and a second one to another customer in November 2022. The advanced packaging segment, excluding services and spare parts, had slight year-over-year growth. This segment includes various packaging tools such as coaters, developers, scrubbers, PR shavers, and wet etchers, in addition to service and spare parts. ACM uniquely provides a complete set of wet tools alongside advanced plating tools. We anticipate that advanced packaging will gain importance as the sector seeks innovations like 2.5D and 3D packaging for enhanced performance, especially in China. In Q4, we added two significant product categories: Ultra-Lith Track Coater/Developer tools and Ultra Pmax PECVD tool. We estimate these additions will double our addressable market to $16 billion, reinforcing our position as a multiproduct platform company. Our Ultra-Lith Track Coater/Developer tool builds on our decade-long expertise in cleaning, coating, and development systems combined with improved performance in our standalone coater developer tools. We believe we are well-positioned to compete in a $3.7 billion track market and many global logic and memory manufacturers are looking for a second track supply source. The Ultra-Lith Track is designed to process 400 or more wafers per hour, which is essential for the next generation of lithography tools aimed at memory manufacturers. We delivered the first Ultra-Lith Track Coater/Developer ARF tool to a domestic Chinese customer in the fourth quarter of 2022 and plan to deliver the i-line model later this year, with development of a KrF model also underway. Our Ultra Pmax PECVD tool signifies ACM's entry into a new process area within front-end semiconductor manufacturing. We are confident that our proprietary design offers improved film deposition, reduces film stress, and enhances particle performance, targeting global logic and memory manufacturers, particularly for 28 nm and above, which presents significant growth opportunities in China as the country increases manufacturing capacity to meet domestic demand. We expect to deliver our first PECVD tool to IC manufacturers soon, and we also anticipate that it will be used in cleaning processes for memory fabrication. We believe these new product categories will create additional growth pathways for ACM in 2024 and beyond. Our sales and service teams are consistently working to enhance our relationships with customers across all our product lines. Our 2022 results highlight strong growth in our core cleaning tools and a positive product cycle in ECP. We expect a similar trend for furnaces in 2023 along with long-term contributions from Track and PECVD. For 2022, we had three customers contributing over 10% to our sales. The Huahong Group was our largest customer at 18%, followed by SMIC at 15%, and YM at 10%. 6XMT and SK Hynix also contributed, albeit below 10% and 5%, respectively. We saw a noteworthy contribution from several second and third-tier semiconductor manufacturers that, while none individually accounted for 10%, combined represented about 20% of our total sales for the year. In 2023, we expect to see growth from our China-based customers, increasing our share in core cleaning tools and benefiting from the furnace product cycle. We anticipate initial sales to the U.S. and European markets as well. We have two cleaning tools currently at a large U.S.-based manufacturer's facility where evaluations are going well, and we are hopeful this will lead to new orders in 2023. Today, we announced an order for our first evaluation tool for a top-tier European client, scheduled for delivery in early Q4 this year. We are also beginning to staff service teams to support this effort, optimistic it could result in repeat orders and potentially open doors to other significant customers in the region. I also want to discuss our brand investment in a new facility. The construction of our Lingang production and R&D center is nearly complete and on track for initial production in the second half of this year. The Lingang campus will encompass 1 million square feet, featuring two R&D buildings, two factory buildings, and one accessory factory equipped with a cleaning room comparable to our customers’ IC production lines to expedite R&D and product process verification. Upon completion, we expect the Lingang campus to have an annual revenue production capacity exceeding $1.5 billion. We are proceeding with the acquisition of a new fully-owned headquarters for ACM Shanghai in Zhangjiang, the Silicon Valley of China, for approximately $47 million, which we purchased in Q4 and will be moving to later this year. This addition will ensure stability for employees, assist in attracting new talent, and enable investment in a top-tier facility to expedite the development of our tools. To support our international growth strategy, we will increase our investment in Korea, which will provide a second source of production capacity for business continuity and additional access to a broader R&D talent pool. We currently have a team of about 70 local R&D engineers collaborating with our Shanghai team on our furnace, track, and PECVD product development. This facility will be strategically located near several major semiconductor manufacturers, enhancing our traction in the region. For 2023, we anticipate capital expenditures of approximately $80 million to $100 million, focused on the Lingang facility, capacity expansion in Korea, and the new ACM Shanghai headquarters. Major spending projects are expected to be completed in the next several years as we remain committed to our $1 billion revenue target. We are optimistic about the domestic semiconductor market in China, predicting that our customers will continue to expand or accelerate capacity in mature nodes, as local production remains considerably lower than market consumption. Increased semiconductor demand will likely accompany growth in electric vehicles and consumer electronics production. Most of our customers have emphasized a need for mature node production sites, including logic devices at 20 nm and above, power devices, and IoT technologies, with good growth expected for the foreseeable future. We are confident we can achieve our $1 billion revenue target from Mainland China alone, based on projected market share across cleaning, ECP, furnace, Track, and PECVD products. There is additional upside from international markets as we are making progress with customers in Korea, the U.S., and Europe, while expanding our global sales and support teams. We are also accelerating our R&D and production efforts in Korea near major semiconductor players, providing an alternative site for customers worldwide. Now, let's outline our outlook for 2023. We confirm our revenue forecast for 2023, expecting it to fall between $515 million and $585 million. This outlook accounts for potential impacts from current U.S.-China trade policies, various spending expectations from key customers, supply chain constraints, and the timing of evaluations for our initial tools in the field, among other factors. In conclusion, we are proud of the progress we made in 2022 and look forward to the opportunities ahead in 2023. We remain dedicated to our mission of becoming a key supplier to leading global semiconductor manufacturers and providing innovative solutions for our customers. Now, I will hand the call over to our CFO, Mark, who will discuss our fourth-quarter results in detail. Mark, please.

Thank you, David. Good day, everyone. Please turn to Slide 11. Unless I note otherwise, I will refer to non-GAAP financial measures, which exclude stock-based compensation, unrealized loss of trading securities. Reconciliation of these non-GAAP measures to comparable GAAP measures is included in our earnings release. I'll now provide financial highlights for the fourth quarter. Revenue was $108.5 million versus $95.1 million last year. Total shipments were $197 million versus $117 million shipped in the year-ago period. Revenue for single wafer cleaning tools and semi-critical cleaning was $74.6 million versus $61.9 million. Revenue for ECP, furnace, and other technologies was $20.2 million versus $19.5 million. Revenue for advanced packaging, excluding ECP, services, and spares, was $13.7 million, approximately flat versus last year. Gross margin was 49.7%, up from 47.9% 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 product mix and a positive impact from the change in the renminbi to U.S. dollar currency 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 $34.8 million versus $25.1 million. We incurred higher R&D costs due primarily to increased personnel. Sales and marketing expenses were higher due to promotional tools and personnel costs. Operating income was $19.2 million, representing a 17.7% operating margin versus $20.4 million. Other expenses net were $6.6 million, primarily due to the impact of exchange rate changes on our payables and receivables for the period. Income tax expense was $2.7 million compared to $3.2 million in the year-ago period. The effective tax rate for the full year 2022 increased primarily due to the requirement for tax purposes to capitalize and amortize previously deductible research and experimental expenses under IRS Code 174 that was effective January 1, 2022. The company's tax provision assumes that 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 $12.6 million versus net income of $18.1 million in the year-ago period. Net income per diluted share was $0.19 compared to net income per diluted share of $0.27 in Q4 2021. I will now review selected balance sheet items. Cash and cash equivalents, restricted cash, and time deposits stood at $420.9 million at the end of the fourth quarter versus $473.2 million at the end of the third quarter. Total inventory was $393.2 million at year end, up from $327.8 million at the end of last quarter. This includes finished goods inventory of $146.9 million, work in process of $79.1 million, and raw materials of $167.1 million. Net cash flow from operations was $1.3 million for the fourth quarter, while net cash flow used in operations was $62.2 million for the full year. Capital expenditures for Q4 were $72.6 million, which included a $47.2 million payment for our new headquarters building in Zhangjiang and spending on our Lingang factory and other items. Capital expenditures for the full year were $91 million. That concludes our prepared remarks. Let us open the call for any questions that you may have. Operator, please go ahead.

Thank you. We have a question from Mark Miller with Benchmark Company. Your line is open.

Congrats on another strong year and outlook. I had a question about the regional distribution of sales. It looks like China was down 20% sequentially. How much of that was due to the restrictions in China? Just wondering what caused that 20% decline in sequential sales in China.

Yeah. Mark, I think it's really hard to give you a precise number. Obviously, there's a reduction in investment in advanced nodes. I don't have that percentage concerning the contribution right now. However, I should say there is still strong demand in the mature nodes. So we believe this year our revenue will continue to grow, primarily due to our new product deployment, especially in ECP and the furnace.

In terms of other regions, there was a nice increase compared to the prior quarter and year-over-year. Can you clarify whether this is coming from the U.S. or Taiwan? I'm curious about where the revenue growth from other regions is originating.

Actually, we expect some revenue this year will come from outside Mainland China, including Korea and the U.S. We're also expecting some potential breakthrough in Taiwan with customers, but not actual revenue yet.

Yeah. Thanks, Mark.

Our next question comes from Quinn Bolton with Needham & Company. Your line is open.

Sorry about that. I was on mute. Hey, guys. Congratulations on the strong 2022 results and the very strong 2023 outlook in the tough WFE environment this year. I have a few questions. One for David or Mark, can you just give us some sense of the 2023 guidance of $515 to $585 million? Do you expect any meaningful contribution from advanced nodes in China, or have you effectively zeroed out the advanced memory and logic nodes in that guidance?

Yeah. Let me give this a first shot. I think we still see some potential purchases occurring, but they're quite reduced compared to last year. So that's not much counted in our projections for this year. However, we do see some speed up for customers and even some new customers in China for mature nodes and power devices. So we anticipate revenue growth from those customers, along with increased contributions from ECP and the furnace.

I wanted to also ask just on the shipments, an impressive number at $197 million in the fourth quarter. I know you don't guide for shipments on a go-forward basis. Can you talk about whether there was anything special going on in December? Was there business pulled out of the September quarter or perhaps pulled in from March? You talked in the prepared script about some supply constraints. It's hard to see the impact of supply constraints when you're at nearly $200 million of shipments a quarter. I'm just trying to get some sense of your outlook for shipments, perhaps qualitatively since I know you don't give guidance for that number.

Last four quarters shipments have also been impacted by constraints. If we had no supply chain concerns, we could have shipped more. The trade restrictions have also limited shipments. I believe the next few quarters will reflect continued growth; however, I’m not saying that the upcoming quarters will exceed the fourth quarter results.

Thanks. And then for you, Mark, obviously, gross margin near 50%, well above your target range of 40% to 45%. How much of the strength in the fourth quarter was due to that higher shipment level? I assume you're achieving good factory utilization at that kind of shipment level. Was factory utilization a big driver for gross margin, or is it really more just a function of the mix of tools that you shipped in December that led to that near 50% margin?

Yeah, Quinn. The strength was predominantly due to the product mix. Factory absorption helps, but it's not a major factor. The product mix was the primary driver for our gross margin performance. We also had some benefits from currency rates, but it's mainly about mix.

Can you quantify the FX impact, Mark? My guess is your mix with furnace and ECP driving a lot of the growth in 2023. It sounds like your mix is going to remain healthy in 2023.

We're not changing our 40% to 45% gross margin target, Quinn. It's a competitive industry in general, and we want to work well with our customers. But 40% to 45% is the right target long term.

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

Thank you.

Thank you. And we have a question from Christian Schwab with Craig-Hallum. Your line is open.

Hey, guys. Congratulations on strong execution and guidance. David, you're not alone in seeing tremendous strength out of the Chinese domestic market. Many others have noted it as well. So, when you look at China and your commentary about adding mature nodes, 28-nanometer IoT power sensors may be a smaller market, but you stated that the capacity within China does not meet domestic demand. How many years of strong capital equipment spending do you think it would take for that to occur? Is it like a three to four, five, or six-year adventure? How long do you believe that would take?

Good question. I would say the trend will continue to go on for probably at least another three years. Ultimately, it depends on the actual market situation, but we do anticipate that trend will keep upward.

Great. Additionally, we've heard from different companies selling into the domestic China market that there appears to be a reinvigorated effort to buy from local suppliers versus international providers in the capital equipment marketplace, providing they have competitive offerings available. Do you see your growth potential benefiting from that over the next three years as well?

For mature nodes, the market remains similar at this moment since the recent trade restrictions are not limiting those. Therefore, I believe every player needs to provide good pricing and stability in their tools while competing on service and product quality. It's a solution game, and I see we have advantages there given our proximity and combined R&D capabilities.

Perfect. My last question concerns initial sales to a large U.S. company. I believe I heard you say that you expect acceptance of those two tools and additional orders from that customer this year. Did I understand that correctly?

Yes. We are qualifying that tool, and we hope to repeat orders as part of their continued expansion plan.

Is that customer working on complex technology like gate-all-around, or is there a technology shift opening opportunities for your products with that customer that didn't exist before?

I can't disclose too much since we are under NDA. We are targeting both logic and memory categories, but I'm not at liberty to discuss specifics.

Understood. In a prior conference call, you mentioned you anticipated around 10% of your shipments would occur outside of domestic China in calendar 2023. Is that still the target we should keep in mind, or was that number misremembered?

Currently, our target is more in the range of 5% to 10%. It's challenging to give a fixed number at this moment, but that’s our goal.

All right. Sounds perfect. Thank you.

Thank you.

Thanks, Christian.

Our next question comes from Chaolien Tseng with Credit Suisse. Your line is open.

This is Chaolien. Thank you, David and Mark. My first question is regarding revenue by region. Is that based on shipment location or the customer's headquarters location?

We're stating that based on the location of delivery to China territory. The final location can be different.

Okay, so that’s determined by the location of where the tools are delivered.

Yes, exactly, just to clarify. Highly exclusive, whatever that is sold and delivered to China is considered for the manufacturers located there, like Hynix.

Got it. My next question relates to the important customers. Can you share how much manufacturing complexity we are preparing for with current and future international customers by the end of this year or next year? Specifically regarding production capacity in Korea?

We are expanding our investments to increase our capacity in Korea. This capacity will not only serve the China market but will also be prepared for secondary manufacturing centers to supply customers outside China.

Thank you, and my last question pertains to R&D ratios for 2023 after last year's major increases.

In 2022, on a non-GAAP basis, the R&D ratio was about 15.3%, up from 12.7% in 2021. We expect that ratio to be about 15% in 2023 as well.

Understood. Would you also comment on your market share within Tier 2 and Tier 3 fab customers in China compared last year to expected growth this year?

In fact, as we noted in the script, that group represents 20% of our sales last year, and we expect that to continue to grow thanks to the expansion of new customers and further development within the second and third-tier customers.

One last question about revenue recognition regarding advanced nodes affected by regulations. For any repeated tools or new tools shipped to fab customers, have all those related revenues already been recognized in the fourth quarter?

In the fourth quarter, there was some revenue coming from advanced nodes, and we expect continued contributions this year while strictly following U.S. trade regulations.

Okay. Thank you, David.

We have a question from Suji DeSilva from ROTH. Your line is open.

Hi, David. Hi, Mark. Congrats on the progress here. I'm expecting growth in some of the newer products to show material gains in '23. What is the competitive landscape like for these newer products like furnace and CMAP? How do they differ from traditional SAPs and Tebo products?

In cleaning, we continue to grow our offerings, including new etchers and drying technology. We expect robust revenue growth from our growing cleaning product line which covers almost 90% of cleaning processes in the industry. Our copper plating and furnace products have also gained market share, and we anticipate this trend to continue in both local and international markets.

Thanks, David. With the shipments in China, can you distinguish what's happening in the foundry logic market versus the memory market to understand the different dynamics at play in support of your '23 forecast?

The growth is primarily within the mature nodes, especially in the logic and power device realm, while growth in the memory market is comparatively slower. Last year, our memory market share stood at about 15%, and we anticipate it may slightly decrease this year.

No, I don't think I'd add anything, David. I think you covered it well.

Great. That's helpful input. Thank you.

Thank you.

Thanks, Suji.

Thank you. I'm showing no further questions in the queue. I'd like to turn the call back to Mr. David Wang for closing remarks.

Thank you, operator, and thank you all for participating in today's call and for your support. Before we close, Gary will mention our upcoming investor relations events. Gary, please?

On March 14, we will present at the 35th Annual ROTH Conference in Dana Point, California. Attendance is by invitation only for clients of ROTH. Interested investors should contact their ROTH representative to register for the conference and request a one-on-one meeting. This concludes the call, and you may all now disconnect.

This concludes today's conference call. Thank you for participating. You may now disconnect.