ACM Research, Inc. (NASDAQ:ACMR) Q2 2023 Earnings Call Transcript

ACM Research, Inc. (NASDAQ:ACMR) Q2 2023 Earnings Call Transcript August 4, 2023

ACM Research, Inc. beats earnings expectations. Reported EPS is $0.48, expectations were $0.1.

Operator: Good morning, and thank you for standing by. Welcome to the ACM Research Second Quarter 2023 Earnings Conference Call. As this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Yujia Zhai, Managing Director of The Blueshirt Group. Please go ahead.

Yujia Zhai: Thank you, operator. Good morning, everyone. Thank you for joining us on today’s call to discuss second 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 and other information that might be considered forward looking.

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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 the risk factors and elsewhere in ACM’s filings with the SEC. 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 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 in Slide 12.

With that, let me now turn the call over to David Wang, who will begin with Slide 3. David?

David Wang: Thanks, Yujia. Hello, everyone, and welcome to ACM’s second quarter 2023 earnings conference call. Please turn to Slide 3. For second quarter, revenue was $144.6 million, up 39% from the same quarter last year. Shipments were $153 million, up 37% from the same quarter last year. Gross margin was 47.6%, and operating margin was 22.4%. We achieved record revenue and EPS, as our operating and industrial supply chain largely returned to a new normal following several years of COVID-related disruption. These results were driven by strong mature node [indiscernible] by our China customer, market share gain and penetration of a new product, a new customer. Let me touch on each of this, beginning with mature node investment in China.

Last year, following U.S.-China trade restriction, some industrial analysts predicted China’s WFE market will be declined dramatically. At that time, we predict a fairly quicker shift to spending on mature nodes in China. After expected pause, as industry adjusted to the new export regulations, our prediction appear to be playing out as we are now seeing broader sign that China has indeed sped up its capacity expansion in mature nodes. This is driven by the substantial gap between China’s mature nodes capacity and market consumption. We see continued investment in 28 nano and 45 nano and above front-end fab capacity. We also see the ramp up EV production in China as a driver of China-based investment in both power devices and other 28 and 45 nano devices.

This creates a good tailwind for us that we believe is still in the early stage, as China intensify effort to boost its domestic semiconductor capacities — capabilities. We believe we are well positioned to benefit and further increase our market share due to our strong market position, leading differentiated technology, and broad multi-product portfolio. Moving to product, please turn to Slide 4. Single wafer cleaning, Tahoe and semi-critical cleaning grew 55%. In the last few years, we introduced and began ramping our semi-critical product line, including auto bench. And then, last year, we introduced Bevel Etch and high-temperature SPM tools. Over past quarter, we introduced supercritical CO2 dry. Now, ACM has one of the broadest cleaning product portfolio in the industry, covering nearly 90% of all cleaning process step.

We believe this product portfolio will play a key role among mature nodes, development in China and advanced nodes in our international effort going forward. ECP, furnace and other technologies declined 7% due to quarterly fluctuation. However, for the first six months of 2023, ECP, furnace and other technologies grew 40% year-over-year. Growth in this category was driven primarily by ECP product cycle with some contribution from furnace. Our higher temperature anneal and LPCVD furnace, including silicon nitride and poly and ARD have expanded to multiple customers and are under evaluation. Advanced packaging, excluding ECP, service and spares grew 14% in Q2 and 58% [year-over-date] (ph). This category includes a range of our packaging tools, including coater, developer, scrubber, PR stripper, and wet etcher, and service and spare parts.

ACM is the only company that offers both of full set of wet tools and advanced plating tool. We believe advanced packaging will become more important as industrial looks for packaging innovations such as 2.5D, 3D [and further] (ph) and fan out to drive the higher performance for new applications such as AI and GPT. Finishing up on products, we continue to make good progress on sales efforts with our new Track and PECVD platform. We’re in active discussion with our key customer, and we are planning to deliver more evaluation tools this year. Similar to our cleaning, plating and furnace product line, our Track and PECVD platform have a proprietary technology that we believe we’re making them winner with major customer both in China and outside China.

Moving on to the customer, please turn to Slide 5. We continue to make progress on customer both inside China and internationally. In China, we believe ACM tools are now used by nearly all of the semiconductor manufacturers. Our sales and service team are working to expand the deployment of each of our major product line across our growing customer base. In addition to our current customer, we’re also seeing a good number of well-funded new entrants. Our team has done a good job of getting good traction for our product with these customers. This, our new customer, [indiscernible] be reflecting our shipment this year until customer acceptance at a later date. Also, as some of you may have heard, on July 21, 2023, Hua Hong Semiconductor, a greater strategic customer, announced their pricing of its Shanghai STAR Market IPO and expected to start trading soon.

The total proceeds were RMB21.2 billion or approximately $3 billion. In the U.S., evaluation at our key customer is progressing well, and we remain optimistic for qualification later this year. In Europe, we announced an order for our first evaluation tool from a major semiconductor manufacturer in the first quarter of this year. The tool is planned to — for deliver in early Q4, and we are beginning to build a local service team to support effort. To support our growing initiatives, we continue making progress on our facility expansion in China and other regions. Please turn to Slide 6. In China, construction of Lingang Production and R&D center is nearly completed and expected to begin initial production later this year. In Korea, as noted in prior call, we have increased our commitment in this region.

We believe a strong commitment to Korea will improve our relationship with our key customer SK hynix and others. In Q1 of this year, we completed the purchasing of a land in a high-tech area outside Zhangjiang as a site for new R&D and Production center. In the U.S., as noted last quarter, we leased a facility in Oregon to add to our service support and the demonstration capability for R&D and custom activities in the region. As a reminder, for 2023, we expect to spend about $100 million in CapEx. This includes continued investment in Lingang facility, remodeling for new headquarters for ACM Shanghai, and our other investment in Korea and the U.S. I will now provide our outlook for the full year 2023, please turn to Slide 9. We reaffirm our 2023 revenue outlook to be in the range of $515 million to $585 million.

The range of outlook reflects, among other things, management’s current assessment of the continuing impact from the international trade policy, together with the [indiscernible], expect spending scenario of a key customer, supply chain constraint, and the timing of acceptance for the first two evaluations in the field. Now let me turn the call over to our CFO, Mark, who will review details of our second quarter results. Mark, please.

Mark McKechnie: 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. Also, unless otherwise noted, the following figures refer to the second quarter of 2023 comparisons are with the second quarter of 2022. I’ll now provide financial highlights for the second quarter. Revenue was $144.6 million, up 38.5%. Total shipments were $153.4 million, up 37%. Revenue for single wafer cleaning tools and semi-critical cleaning was $112.5 million, up 55%. Revenue for ECP, furnace and other technologies was $19.1 million, down 6.7%.

For the first six months of 2023, this category grew by 39.6% versus the prior-year period. Revenue for advanced packaging, excluding ECP, services and spares was $12.9 million, up 14.3%. Gross margin was 47.6%, up from 42.4%. This exceeded our normal expected range of 40% to 45%. The increase in gross margin was primarily due to a favorable product mix, improved gross margins for specific product lines, and a favorable impact from fluctuations in the renminbi to U.S. dollar 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 $36.3 million, up from $22.3 million. The increase was due to higher R&D, sales and marketing and G&A costs in support of our new customer and new product activities and a boost in the post-COVID travel.

Operating income was $32.4 million, up from $22.0 million. Operating margin was 22.4%, up from 21.1%. We recorded a realized gain of $3.9 million from the sale of trading securities for the quarter. Recall that realized gains are included in the non-GAAP earnings. Income tax expense was $7.6 million, down from $7.7 million. Recall that as a result of the change in Section 174 of the U.S. Internal Revenue Code, our effective tax does remain elevated primarily due to the requirement to capitalize and amortize previously deductible research and experimental expenses. Net income attributable to ACM Research was $31.3 million, up from $14.6 million. Net income per diluted share was $0.48, up from $0.22. Now, I’ll review some selected balance sheet items.

Cash and cash equivalents, restricted cash and time deposits were $376.1 million at the end of the second quarter versus $381.7 million at the end of the first quarter. Total inventory was $471.1 million at the end of the second quarter, generally flat versus the end of the first quarter. Capital expenses for the second quarter were about $6.7 million. I’ll now provide an update on our auditor. On July 21, 2023, Armanino informed us that it will resign as our independent auditor, effective as the earlier of, a, when we engage a new auditor or, b, the filing of this year’s third quarter 10-Q report. They advised us this was due to their decision to exit from the practice of providing financial statement audit services to all public companies.

As a result, our audit committee has begun the process to select and appoint a new auditor. We filed an 8-K with the full details on July 27, 2023. And I would note that we’ve also seen a number of similar filings from other Armanino clients. Regarding the search for a new auditor, we are considering several options including U.S. and China-based auditors. That concludes our prepared remarks. Now, let’s open the call for any questions that you may have. Operator, please go ahead.

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Q&A Session

Operator: [Operator Instructions] The first question comes from Quinn Bolton with Needham & Company. Your line is open.

Quinn Bolton: Hey, guys. Congratulations on the very strong second quarter results. I guess kind of big picture question for the second half of the year, I know you’re not increasing your 2023 guidance, but since you’re not increasing the guidance, it looks like revenues may flatten out or at least grow at a much, much slower rate in the second half. How are you thinking about the second half? Was the second quarter really that sort of COVID supply chain catch up and you see more normalization now? Or just any thoughts you could share on the second half, or the shape of revenue in the second half would be helpful.

David Wang: Yes, okay, Quinn. In general, actually, looking at the last couple of years, our second half year was stronger than their first year — I mean, first half year, right? I think that trend will probably continue. And regarding to the supply chain, I should say, it’s much better than last year, but still feel some components get constrained. I’m thinking maybe second half of this year, that will improve further and — for supply chain. Mark, anything you want to add on?

Mark McKechnie: Yes, you bet. So, Quinn, our overall outlook obviously, we factor in — we’re looking at a flattish overall CapEx for overall China. I think there’s a lot of debate about that, but we see better growth from our new products, share gains and new customers. First half/second half, I mean, you can look at the numbers, but it’s about 40%/60%. And so, we’d expect Q3 to be up, and depending on where the year plays out, Q4 could be down, which is — that’s the normal type seasonality for us. Yes.

Quinn Bolton: Got it. So sort of perhaps a return to more of a down fourth quarter post a couple of years of COVID where I think seasonality was largely out the window. Got it. Second question, just, mark, for you on the auditor. I know that this has been a thorn in your side for probably a couple of years now. To the extent that you select a China-based auditor, can you just sort of walk us through — I believe there’s now a process in place where PCAOB has oversight of China-based auditors. And so, if you select China that shouldn’t have any impact on your listing status in the U.S. But I know it’s been a subject that’s raised lots of questions. So, can you just walk us through the latest implications to the extent you do select a China-based auditor? Thanks.

Mark McKechnie: Yeah, you bet. Thanks for that question, Quinn. So, I think, as you know, last year, we did cut over to Armanino, a U.S.-based auditor, and they completed a good audit for our 2022, signed by — they’re officially a U.S. auditor. But yes, the rules, there was a positive development late last year, the PCAOB was able to inspect the China auditors. And so, the so called HFCAA Act, which would result in a delisting if you were on a certain list three consecutive years in a row, that became moot at least for the foreseeable now that we believe the PCAOB has been granted the inspections in China. So, that’s why we pointed out in terms of our possibilities range U.S. auditor, but we could certainly go with a China-based auditor as well, and maintain our listing at this point.

Quinn Bolton: Great. And then, a final quick one for me. David, you mentioned sort of expanding placements of Track and PECVD this year. Can you give us sort of any sense how broad you may be able to go with those evaluations to an expanding customer base, or to an expanding base within your existing customers with Track and PECVD?

David Wang: Yeah. Actually, as I mentioned, we do have also differentiated technology with PECVD, right? So now we’re actually have two model; one for memory application, another one for the real logic, right, foundry application. So, this year, we’re working with probably both side of the customer and we try to get evaluation going on. And obviously, revenue will come in next year, right? So, PECVD is a huge market and also has really [indiscernible] product, right, other than our furnace. We have a really high expectation and we put a lot of effort and put both on this product and also expecting very good outcome, good future and to drive — ACM continue to grow in the next few year at a high growth rate. So, it’s an exciting product.

Quinn Bolton: Thanks, David. Thanks, Mark.

David Wang: Thank you, Quinn.

Operator: [Operator Instructions] The next question comes from Suji Desilva with ROTH Capital. Your line is open.

Suji Desilva: Hi, David. Hi, Mark. Congrats on the progress here. So, just to dig in a little bit on the ECP furnace category, I want to make sure what’s the decline here. Was the furnace products uptake [indiscernible] product uptake still ramping? And — or within, is there just supply chain catch up across that category?