Thank you for joining us, and welcome to the ACM Research First Quarter 2023 Earnings Conference Call. All participants are currently in listen-only mode. This program is being recorded. I would now like to introduce your host for today's program, Gary Dvorchak, Managing Director of The Blueshirt Group. Please proceed.

Thanks, Jonathan, and good morning, everyone. Thank you for joining us on today's call to discuss first quarter 2023 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 financial results that we provide on this call will be on a non-GAAP basis, which excludes stock-based compensation and unrealized gains or losses 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 look at 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 earnings conference call for the first quarter of 2023. For the first quarter, we reported revenue of $74.3 million, a 76% increase from the same quarter last year. Shipments reached $89 million, which is up 33% from the prior year. Our gross margin was 53.8%, and our non-GAAP operating margin was 14.7%. The results for the first quarter were influenced by several factors, including COVID policies, the Chinese New Year holiday, supply chain issues due to U.S. restrictions, and some delays in deliveries to specific customers. We anticipate improvement in our business for the second quarter, with further acceleration expected in the third and fourth quarters. Regarding our product performance, we experienced notable growth in our cleaning tools and saw an increased contribution from our ECP furnace and other technologies, with a strong product cycle from ECP products accounting for over one-third of our first-quarter sales. Our single-wafer cleaning, Tahoe, and semi-critical cleaning saw a growth of 41%, boosted by demand for single-wafer cleaning tools and strong activity in mature nodes in China. ACM boasts one of the most comprehensive cleaning product portfolios in the industry, covering nearly 90% of all cleaning process steps. Recently, we launched several significant new cleaning tools, including the Bevel Etch tool and a high-temperature SPM single-wafer cleaning tool, which will support our international initiatives. In Q1, we achieved customer qualification for our single-wafer wet Bevel Etch tool. ECP furnace and other technology sales surged by 117%, driven primarily by the ECP product cycle, along with some contributions from the furnace segment. Our higher temperature Anneal and LPCVD furnaces, such as those for silicon nitride and poly, have expanded their reach to various customers and are undergoing qualification. In advanced packaging, excluding ECP services and spare parts, we observed growth from a small base last year, representing about 15% of our sales. This segment includes a range of packaging tools such as coaters, developers, scrubbers, PR strippers, and wet etchers, alongside service spare parts. ACM remains unique in offering a complete set of web tools and advanced plating tools, which we believe will become increasingly vital as the industry seeks packaging innovations like 2.5D and 3D technologies in the Appolo and fan-out areas to enhance performance. Our product line is exceptionally well-suited to meet the near-term investments in mature nodes and power devices in China. We continue to see investment in front-end fab capacity for 28, 45 nanometers, and beyond, as China strives to bridge the gap between its semiconductor consumption and production. Additionally, the rise of EV production in China is driving domestic investments in both power devices and other 28 and 45-nanometer technologies. In this environment of expanding mature nodes, we anticipate strong growth from our cleaning tools, particularly our auto bench, which is well-suited for these applications. With respect to our applications and products, I have confidence in both our PECVD and Track platforms. Similar to our cleaning, plating, and furnace product lines, our PECVD and Track platforms utilize proprietary technology that we believe makes them competitive with major customers, both domestically and internationally. We are actively engaging with key customers, who are favorable towards our new approaches, technologies, costs, and wafer throughput. While we do not expect revenue in 2023, we plan to provide several evaluation tools to key customers this year. ACM has developed a scalable business in cleaning, and we are experiencing a robust product cycle across ECP, furnace, and other technologies. With Track and PECVD, we are transitioning from the proof-of-concept phase last year to active evaluations with key customers. We now believe that our differentiated technology can compete effectively with any major players in the market. On to our customer landscape, I'm satisfied with our standing with China-based customers and the progress we are making with potential new clients in other regions. In China, we believe ACM tools are presently utilized by nearly all semiconductor manufacturers. Our sales and service teams are focused on broadening the deployment of each of our major product lines across our expanding customer base. We continue to gain traction among second and third-tier semiconductor manufacturers, including those in power, analog, CMOS image sensor, compound semiconductors, MEMS, and various other devices. In the U.S., evaluations for a crucial potential customer are advancing positively, and we remain hopeful that these discussions could lead to production orders. In Europe, we received an order for our first evaluation tool from a top-tier customer in the first quarter, which is scheduled for delivery in early Q4 this year. We are also in the process of establishing a local service team to support these initiatives. To facilitate our growth, we're expanding our facilities in China and other regions. Regarding China, the construction of our Lingang production and R&D center is progressing on schedule for initial production in the latter half of this year. We have taken ownership of our new headquarters in Zhangjiang, Shanghai, and plan to relocate there later this year. This move is crucial for us as it will provide stability for our employees, assist in attracting new talent, and enable us to invest in a state-of-the-art R&D center to accelerate the development of our tools. In Korea, we have a solid team of over 70 R&D engineers and more than 50,000 square feet of leased R&D, administrative, and production space. Our collaboration in Korea has been instrumental in developing our furnace Track and PECVD products alongside our Shanghai R&D team. As mentioned in prior calls, we have increased our commitment to Korea, which we believe will enhance our relationships there. Additionally, we are augmenting our resources in the U.S. to support ongoing evaluations and boost sales activities. In Q1, we secured a facility in Oregon to bolster our service support and demonstration capabilities for R&D and customer engagements in that region. As highlighted in the previous call, for 2023, we anticipate spending around $100 million in capital expenditures. This will encompass continued investment in our Lingang facility, renovations for our new headquarters in Shanghai, alongside our investments in Korea and the U.S. Following these significant investments, we believe that our major spending projects will be largely completed for the next several years. I will now share our outlook for the entire year of 2023. We reaffirm our revenue guidance for 2023 to be in the range of $515 million to the first tool on evaluation in the field. Now, let me hand the call over to our CFO, Mark, who will go over the details of our first quarter results. Mark, please?

Thank you, David. Good day, everyone. Please turn to Slide 10. Unless I note otherwise, I will refer to non-GAAP financial measures, which exclude stock-based compensation and unrealized loss on trading securities. Reconciliation of these non-GAAP measures to comparable GAAP measures is included in our earnings release. Recall that our operations last year in the first quarter of 2022 were impacted by the Shanghai COVID restrictions. As David noted, our operations in the first quarter of 2023 were impacted by China's relaxed COVID policy, the Chinese New Year holiday, supply chain challenges related to U.S. restrictions, and some delayed deliveries to certain customers. I will now provide financial highlights for the first quarter. Revenue was $74.3 million versus $42.2 million in the first quarter of last year. Total shipments were $89 million, up 33%. Revenue for single-wafer cleaning tools and semi-critical cleaning was $36.6 million, up 41% from $26 million in the first quarter of last year. Revenue for ECP furnace and other technologies was $26.6 million, up 117% from $12.2 million in the first quarter of last year. Revenue for advanced packaging, excluding ECP services and spares, was $11 million, up 183% from $3.9 million. Gross margin was 54%, up from 46.9% in the prior year period. This exceeded our normal expected range of 40% to 45%. The high gross margin was primarily due to a favorable product mix with a particularly strong mix of our higher-margin products and a lighter mix of our lower-margin products for the quarter. 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 $29.2 million versus $27.7 million in the year-ago period. The increase was due primarily to higher sales and marketing and G&A costs, partly offset by lower R&D costs. Operating income was $10.9 million, representing a 14.7% operating margin versus an operating loss of $7.9 million in the year-ago period. We recorded a realized gain of $4 million from the sale of a portion of ACM Shanghai shares of SMIC for the quarter. Recall that the realized gains are included in non-GAAP earnings. Net income tax expense was $2.9 million compared to an income tax benefit of $4 million in the year ago period. As a result of the change in Section 174 of the U.S. Internal Revenue Code of 1986, as amended, that became effective on January 1, 2022, our effective tax rate has increased primarily due to the new requirement to capitalize and amortize previously deductible R&D expenses. Net income attributable to ACM Research was $9.9 million versus a net loss of $0.6 million in the year ago period. Net income per diluted share was $0.15 compared to a net loss per diluted share of $0.01 in Q1 of 2022. I will now review selected balance sheet items. Cash, cash equivalents, restricted cash, and time deposits were $381.7 million at the end of the first quarter versus $420.9 million at the end of the last quarter. Total inventory was $473.3 million at the end of the first quarter, up from $393.2 million at the end of the last quarter. This includes finished goods inventory of $195.7 million, work in process of $74.4 million, and raw materials of $203.2 million. Capital expenditures for the first quarter were about $15 million, which includes spending on our Lingang facilities and normal maintenance spending. As David mentioned, the purchase of land in South Korea. That concludes our prepared remarks. Let's open the call for any questions that you may have. Operator, please go ahead.

Our first question comes from Quinn Bolton from Needham & Company.

Congratulations on the nice results and continued strong outlook. I guess first, maybe David and Mark, can you just give us your sense of spending in the China market, both on the mature nodes, but also including power semiconductors and silicon carbide? Are you seeing continued strength in those nodes? And how sustainable do you think that spending is?

Okay. Well, actually, looking at the real electric vehicle growth market in China is very promising. A lot of Chinese people enjoy driving electric cars because of the lower gas expenses. So we see that market continuing to grow, and they are using much more silicon-based power devices versus silicon carbide. We anticipate that the demand for 12-inch wafer fabs and IGBTs or power devices is accelerating. This market will maintain steady growth, with multiple fabs and customers aiming for this high-potential area. We also see this as a significant driver for future growth for both cleaning tools and Tahoe plating tools and the furnace, including PECVD and even Track in the future. Our observed trends indicate that people are also investing in 28 and 45 nanometer devices along with other MEMS devices with solid growth potential over the coming years.

And Mark, I know you have been putting a lot of working capital into inventory over the past couple of years. Balances now up to almost $500 million. Is there a point where you start to throttle back on inventory? I was particularly surprised by the increase in finished goods, as your shipments weren't up that significantly, but wondering if you could just give us your latest thoughts as you approach the $500 million of inventory on the balance sheet. Does that balance start to level out for a period of time?

Yes. Thanks, Quinn, on that. So for the quarter, Q1 shipments were down, right? There were a number of reasons for that, including the relaxation of COVID restrictions, where many employees and our customers caught the illness in December and January. You had the Chinese New Year and the adjustments to the U.S. restrictions as well, alongside some delays. So that led to a lower shipment number. And our overall inventory uptick involves raw materials, work in process, and finished goods inventory. We expect our shipments to rebound nicely in Q2 and beyond. So that's one driver for the inventory. I think you also know that most of our finished goods inventory includes the evaluation tools that are with our customers. So we had an increase quarter-on-quarter from that. We also experienced a quarter-on-quarter increase of finished goods inventory that was not shipped to the customer. For those reasons, we anticipate the inventory has reached an elevated level this quarter. We'd expect that to be a high watermark and should begin to decrease as we progress.

One moment for our next question. And our next question comes from the line of Suji Desilva from ROTH Capital.

So the gross margin in the quarter was above trend. I'm curious, can you remind us which segments are above trend that are driving that? I know non-single wafer clean is doubling year-over-year; is that a pace that could continue and what would the gross margin implications be?

Yes. I think, Suji, gross margin really depends on product combination. It largely depends on the proportion of high-margin products versus low-margin products. I still think our margin will remain within the range of 40% to 45%. The reason for this is we're still driving our products like cleaning and advanced single-wafer along with the auto bench. For the ECP, we have offerings for both front-end and back-end processes too. So I would say our expectations still align around that range of 40% to 45%. Until we see the full maturity of our PECVD and Track technologies, especially as we expand into international markets, that may change. However, for the near future, our projected gross margin remains 40% to 45%.

And then you related the full year expectation. Do the customer delays that you saw in Q1, are those normalizing and recovering as expected right now? Do you expect any lingering impact in the 2023 numbers stemming from COVID or U.S. geopolitical challenges in China?

Yes. There were some delays, right? And I believe that both advanced nodes and some mature nodes have faced delays as well. However, I think those delayed shipments will likely still occur until the end of this year, with some potentially carrying into next year. Additionally, we anticipate seeing new customers emerging as we move forward. Overall, for this year, our shipment numbers are still expected to hit record highs, which is promising. However, the revenue will mainly come from these new customers. Therefore, we are confident in maintaining our revenue projections as we have shared, and we anticipate having a clearer picture in the second quarter, which may prompt us to start making adjustments based on the outlook for the next six months or beyond.

Our next question comes from Charlie Chan from Morgan Stanley.

So my first question pertains to your first quarter revenue. I'm wondering what the unsteady factors are; as we all know the Chinese New Year and COVID policies were issues. But were there any other unforeseen events? I feel like for the full-year target, your quarterly run rate should be around $90 to $100 million, yet this seems like a significant shortfall. Could you provide further explanation on that?

Yes, let me clarify, perhaps Mark can add more. Actually, the first quarter is usually lower, right? Obviously, the Chinese New Year impacts it, and this year especially, the relaxation of COVID conditions also affected our operations and supply chain significantly. Therefore, while comparing our first-quarter results year-over-year indeed showed improvement, it remains below expectations. Looking ahead to the stronger second quarter, we expect third and fourth quarters to be even stronger. Thus, we see the first quarter results as typical and natural, and we expect further growth in the coming three quarters.

Yes, Charlie, the only thing I would add is that if you looked at last year, the first half of the year typically accounts for about 35% to 40%, with the remainder coming in the second half. This year, we expect the first half to fall within a similar 35% range, while the back half covers the rest. We discussed a few quarters ago the impact of the advanced node restrictions, which have led to pauses in the overall supply chain as well as our customers adapting to comply with the rules affecting the first half.

Okay, yes. So the cause behind the shipping shortfall is something that was not fully captured. Is that a fair interpretation?

No, I think we captured that. Yes. I mean that was anticipated, as we had discussed towards the end of last year.

I should clarify that there are some delays on shipments for certain customers, which likely impacted our revenue in Q1 and possibly for Q2. It's uncertain when these shipments will resume, as this condition is contingent on how the market evolves. Hence, we are not entirely clear at this moment regarding timing.

Alright, thank you for clarifying those details. I feel confident that the company is executing well but the share price hasn't performed as expected. I apprehend this may stem from the first quarter revenue shortfall. However, I appreciate the insights provided. My second question is related to the long-term opportunities. The outlook for China now seems more dependent on power semiconductors, analog, and EV end market. In terms of cleaning tools, can you provide a comparison of CapEx between mature nodes versus leading-edge technology? For instance, if I assume cleaning is 10% of the mature node and 5% of leading edge, is that the correct way to think about the opportunity?

Yes, I would suggest that we are still seeing significant activity at the 28 and 45 nanometer mature nodes. Also, there’s considerable spending for power devices, which primarily revolve around 60nm to 80nm devices. Looking to the future, within the next year or two, we expect to see numerous fabs entering production for these power devices. Thus, the combination of mature nodes and power devices is expected to drive continued demand. For cleaning tools, approximately 80% of those applications remain in mature nodes, whereas for 45nm and above, we can foresee a similar percentage dedicated to the auto bench. Our product portfolio effectively covers both requirements. Therefore, we anticipate ongoing strong demand for the auto bench, particularly as operators transition towards 45nm and power devices.

And my last question concerns your supply chain and the Lingang facility. David, you mentioned in your previous earnings call that Lingang could improve gross margins. Is that still the case?

Yes, indeed. The gross margins will be influenced by the mix of high-margin versus low-margin products, including elements within the PECVD line having a mixture of product profitability. For now, I would continue to expect our gross margin range to stay within 40% to 45%. Our path to achieving higher margins will come with the successful rollout of innovative high-margin products. Yet for the immediate future, I anticipate maintaining the gross margins around 40% to 45%. However, Lingang will undoubtedly improve our long-term value and gross margins, but in the short run, it might add some costs initially.

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

Congratulations on the continued extremely strong revenue growth outlook versus WFE. I'm wondering, number one, your thoughts on the rumors that CXMT is planning a large IPO, as they have historically been one of your customers, which could result in significant capital influx. Should we view that as a very positive development for you over time?

Yes, I think we are seeing ongoing growth, and certainly, they are one of our major customers. We provide cleaning tools and various services in their production lines, including copper plating, and we even project advancing technologies like furnaces and PECVD in the future. CXMT is viewed as one of our significant contributors to potential future revenue streams.

And as for the total available market, you've talked about reaching $1 billion in business just in Mainland China, plus the rest of the world having additional upside. You’ve mentioned you have your first evaluation tool in Europe and a local service team that’s being established. Plus, you announced a local service team in Oregon, close to Intel, a major U.S. manufacturer. What indicators would you need to see to start including the rest of the world, which represents 10 times the size of the Chinese market, in your long-term revenue projections?

At the moment, I maintain that most of our sales still originate from China. However, we see significant potential for our differentiated products, such as cleaning and copper plating, penetrating markets outside of China. Particularly in Korea, we are engaged with multiple products as well as with clients in Taiwan, the U.S., and Europe. Currently, our focus remains on cleaning; however, interest for copper plating is growing too. As we forge ahead with our expansion into the global market, we anticipate more opportunities for firing up demand for not only megasonic cleaning but also our range of cleaning tools and copper plating tools. My goal is for ACM to achieve a balanced revenue composition, with half coming from Mainland China and half from other regions as part of our strategic development.

There seems to be a consistent acknowledgment amongst companies including yours, Applied Materials, and Lam that strength in China is apparent. However, I recall you previously mentioned that the consumption and production gap would likely take at least three years to close. Did I remember that correctly?

Yes. We’re witnessing considerable demand for mature nodes, particularly in the 28 to 45 nanometer range, and the gap between consumption rates and semiconductor production in China is still prominent. This disparity will slowly diminish as more fabrication facilities are established. Notably, the surge in electric vehicles is also generating new demand for the China market. The dual focus on increasing production capacity for 28 and 45 nanometer nodes, as well as power devices, will drive new consumer demand.

Our next question comes from the line of Mark Miller from Benchmark.

Just curious if you could provide insight or estimation regarding the SAPS tool purchase order from Europe, as well as your support setup for U.S. customer operations in Oregon. Looking at your projections for sales this year, what percentage do you believe will come from outside of China?

Well, Mark, it's difficult to provide a precise statistic right now. We're closely collaborating with major customers as we continue to enhance investments in our sales, marketing, and service teams beyond Mainland China. We remain in the exploratory phase concerning the market. We need to secure initial qualifications prior to accumulating repeat orders and subsequently larger orders for our product lines. For the next few years, I believe the majority of our revenue will still come from Mainland China; however, we are optimistic regarding our growth within Korea, the U.S., Taiwan, and Europe. At this point, it's challenging to provide a specific percentage for the year ahead; it truly hinges on the pace and success of our team's sales and service efforts outside of Mainland China.

Many semiconductor firms have performed well by supplying EV manufacturers in China. I'm curious if you can share your impression of the percentage of sales this year that are related to EV manufacturing?

I can't provide an exact number, but I can affirm that we are witnessing several production lines in the planning and expansion phases. This truly reflects a dedicated effort towards the electric vehicle market, which incorporates power devices, analog components, and 28-nanometer technology aimed at enhancing automotive applications.

Our next question comes from the line of Donnie Teng from Nomura.

David, congrats on the strong first quarter results. My first question is regarding your product mix in the first quarter. The percentage of cleaning tools declined quite significantly year-on-year, indicating strong progress in cleaning tools. However, your target previously forecasted that wafer cleaning would account for a very large portion of this year's sales. Does that mean you're modifying your target this year? Shall we expect cleaning tool sales to significantly improve this year? How would this affect gross margin?

Yes. In our detailed product mix, cleaning tools accounted for lower than 70%, around 65% this quarter. However, I believe this figure may not represent the whole year. Thus, I expect cleaning tools to hold around 70% of our sales this year. One key aspect contributing to this is the rapid growth of our auto bench. Additionally, demand for single-wafer cleaning tools has also shown promise. Therefore, projecting 70% remains reasonable; however, I see that our furnaces and electroplating tools are indeed growing.

And one follow-up: For the ECP and furnace tools, are the major customers similar to those for wafer cleaning tools, or are they from different categories?

They're primarily from similar categories. Copper plating is typically more inclusive of the front-end and back-end markets. Regarding copper plating, we have tailored our services mostly toward the 28-nanometer sector. Customers are actively investing in 45-nanometer products and even power devices that utilize copper plating. Additionally, our advanced packaging tools also cater to the copper plating market. We observe a growing trend in copper plating and furnace adoption as multiple customers increasingly demand these products. There's definitely an upward trajectory for non-cleaning product categories.

Understood. Secondly, regarding the leading NAND manufacturer in China, are they still expanding their capacity, or are they focusing more on qualifying domestic equipment production lines, delaying the incremental capacity expansion until the qualification is completed? Additionally, have you seen indications of Hynix expanding capacity in China again?

We have not seen any indications thus far. The DRAM market continues to suffer from pricing issues, leading to uncertainty about further capacity expansion at Hynix’s Wuxi facility.

Thank you. For this strong first quarter's sales and shipment performance, who were the primary drivers behind the sales growth? That's my final question.

It's quite difficult to provide precise contributions at this quarter stage. Typically, we disclose customer percentages on an annual basis, right, Mark? Those are provided once a year at the end of the year. Given that, I can say that existing customers continue to drive significant contributions, and we are witnessing new customers moving towards repeat orders. However, the revenue inferred from the new customers remains unaccounted for in Q1. Thus, existing customers still represent a substantial share of our performance.

Mark, could you please clarify your thoughts on stock-based compensation? Was it around $2 million during the quarter?

Yes, it was $2.1 million for the quarter.

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to David Wang for any further remarks.

Okay. Thank you, operator, and thank you all for your participation on today's call and for your support. Before we close, Gary is going to mention our upcoming investor relations events. Gary, please?

Thanks, Dave. On May 31, we'll present at the 20th Annual Craig-Hallum Institutional Investor Conference in Minneapolis. Attendance at the conference is invitation-only for clients of Craig-Hallum. Please contact them to register and request one-on-one meetings with us. So this concludes the call. You may all now disconnect.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.