ACM Research, Inc. (NASDAQ:ACMR) Q3 2024 Earnings Call Transcript

ACM Research, Inc. (NASDAQ:ACMR) Q3 2024 Earnings Call Transcript November 7, 2024

ACM Research, Inc. beats earnings expectations. Reported EPS is $0.63, expectations were $0.37.

Operator: Good day, ladies and gentlemen. Thank you for standing by and welcome to the ACM Research Fiscal Third Quarter 2024 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’ll turn the call over to Mr. Gary Dvorchak, Managing Director of The Blueshirt Group. Gary, please go ahead.

Gary Dvorchak: Good day, everyone. Thank you for joining us to discuss third quarter 2024 results, which we released before the US market opened today. The release is available on our website as well as from Newswire services. There is also a supplemental slide deck posted to the Investors section of our website that we will reference during our prepared remarks. On the call with me today are our CEO, David Wang; our CFO, Mark McKechnie; and Lisa Feng, our 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 on short-term investments. 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 to slide 13 – and refer to slide 13.

Let me now turn the call over to David Wang, who will begin with slide 3. David?

David Wang: Thanks, Gary. Hello, everyone. And welcome to ACM Research third quarter 2024 earnings conference call. Please turn to slide 3. For the third quarter, revenue was $204 million, up 21%. Shipments were $261 million, up 23%. Profitability was good with a gross margin of 51.6% and operating margin of 27.5%. And we are ending the quarter with approximately $369 million of cash and time deposit with a positive cash flow from operations for the quarter. Revenue for the first nine months of the year was $558.6 million, up 44%. Year-to-date shipments were $709.7 million, up 56%. We believe this growth is significant, demonstrate market share gain for ACM and their contribution from new product cycle. Now I will provide the detail on product.

Please turn to slide 4. Revenue from single wafer cleaning, Tahoe and semi-critical cleaning product grew 22% in Q3 and represented 79% of total revenue. ACM offer comprehensive top to bottom cleaning portfolio. We estimate the global total available market, or TAM, for the cleaning is close to $6 billion, and ACM products are probably more than 90% of all cleaning process steps in both memory and their logical manufacturing. [indiscernible] in sulfuric acid peroxide mixing, or SPM, have led to increased confidence toward our target for continued market share gain in cleaning. As a reminder, we estimate SPM process represent about 25% of total front-end cleaning market, but so far it has been a small contributor to our business. During prior report, we announced a technical progress in our high temperature SPM solution.

Recall that only one other major cleaning tool supplier services the high temperature market for SPM. During our first quarter call, I reported a technical break that could enable us to be the second player. We are now in later stage evaluation at a number of key customer, and we are committed to become the second supplier in the world supporting commercial high temperature SPM cleaning. That’s not all. Today, we issued a press release marking a major performance breakthrough for Tahoe, ACM’s environmental solution for the middle and low temperature SPM segment. The Ultra C Tahoe now achieve the performance of a standalone single wafer cleaning tool on low to high temperature SPM process. The Tahoe platform advanced cleaning capability have achieved average particle count of less than 6 particle at 26 nano size, meeting the stringent requirement for the advanced node manufacturing.

The tool is also capable of removing YX nanoparticle for the most advanced logic memory applications, with additional of a smaller particle filtering system. Tahoe’s patented hybrid architecture is among the first in the industry to combine batch wafer process and a single wafer cleaning chamber into the same SPM tool. The hybrid architecture deliver enhanced cleaning performance, high throughput and process flexibility with up to 75% reduction in chemical consumption. ACM estimates cost savings of up to $500,000 per year from sulfuric acid alone, with additional environment and cost benefit from reduced sulfuric acid and treatment and disposal. With the rise of AI to the forefront of the consumer mind, we expect to increase public attention on the environmental impact of semiconductor chip manufacturing.

We believe ACM Ultra C Tahoe is well positioned to help customers increase production of advanced AI chips, but with reduced footprint on the environment. Put another way, Tahoe is good for customers and good for planet. We believe Ultra C Tahoe is another example of excellency from ACM innovation and the world class R&D team, and demonstrates how innovation can achieve the information economy and the protected environment. We also announced today that the upgraded Ultra C Tahoe is now in mass production at several high volume customer facility in China, and under evaluation at an additional logic and memory customers. We expect to deliver more units by end of year. The market opportunity for Tahoe is quite large as the middle and low temperature is more than 80% of their SPM market and thus about 20% of their overall cleaning total tools market.

We believe ACM cleaning portfolio, including SAPS, TEBO, Tahoe, semi-critical, together with SPM and super-critical CO2 drying, put ACM in world class status. We see good opportunity for continued market share gain in mainland China, and we are confident we have what it’ll take to secure major customer in international market. Revenue from ACP furnace and other technology grew 36% in Q3 and represent 17% of total revenue. Momentum for our plating tool remains solid for both frontend and backend tools. I’m pleased with the revenue performance. I also noted that shipment for the ACP furnace category grew by 67% year-to-date. Our furnace product cycle is also gaining traction with other memory and analogy customers. Overall, we now anticipate of having 17 furnace customers by the end of this year, up from the nine at the end of last year.

We expect a contribution to revenue from furnace to accelerate in 2025. Revenue from advanced packaging, which excludes ECP, but includes service and spares, declined by 21% for Q3 and was up 3% year-to-date and represented 4% of revenue. This category including a range of packaging tools, including coder, developer, scrubber, PR stripper, and web etchers, and also service and spare parts. And we are exploring new products and technologies to participate in the next generation of advanced packaging. We believe ACM is one of the only companies that offers a full set of web tools, cover plating tool, and a polish tool for advanced packaging. Year-to-date growth of advanced packaging was low. We attribute this to slower growth for China-based packaging firms who are more exposed to a broader end market trend.

We also know this category does not include our ECP tool for the advanced packaging. In early September, we announced purchasing orders for four wafer-level packaging tools from US customer and US R&D centers. These tools are scheduled for delivery in the first half of 2025. We are very optimistic about our fan-out panel level packaging tools. We have recently announced three panel-level packaging tools, including vacuum flux cleaning tool for Chiplets, the horizontal plating tool, and the bevel edge tool. These three new panel tools make a strong offer by ACM to address advanced panel-level packaging market. We have been developing this technology for years, and I believe the market is now coming to us. Our technology is applicable to [indiscernible] high temperature or high density packaging.

This is especially relevant to AI packaging of a GPU at a high density, high bandwidth memory, HBM. We see a large global opportunity as several major American leaders are choosing panel for their AI chip packaging solution. Finish up on the product. We are making good progress with our track and the PECVD platforms. Both of these products have innovation, a differentiated platform design, and allow for process flexibility and high throughput. We have a solid list of ongoing demonstration and evaluation for both track and PECVD. We expect further progress for both PECVD and track over the next year, with the revenue likely in later 2025 and more and more contribution in 2026 and beyond. Moving on to the customer. Please turn to slide 7. In Q3, we saw broader demand for foundry logic, power, and memory.

We had a full 10% customer for the period represent 63% of the revenue. In China, we have a leading position in cleaning and target additional market share gains. We believe we have become a world-class multi-product company with a competitive product in the market for plating [indiscernible] and we have a solid evaluation pipeline for track and PECVD. In the US, we’re continuing to make steady progress. I already mentioned the order for four WFE tools scheduled for delivery in 2025. In addition, activity with our major US customer continues to progress. Both of our SAPS tools have already achieved supplier qualification, and we have moved to the production qualification process. And the backside of the bevel edge tool [indiscernible] of this year, is in the later stage of a supply qualification.

In Europe, we are also in the later stage of a qualification of Ultra C SAPS 5 cleaning tool, which we deliver to a major global semiconductor manufacturer in Q3 of 2023. In Korea, we remain engaged with the customer for a range of tools. To support the goal, we made a progress on our facility expansion in China and other region. Please turn to slide 8. In China, on October 20th, our subsidiary, ACM Shanghai, hosted an opening ceremony for the Lingang production and R&D center that are gathering employees, customers, supplier and local officials. The first of two modern manufacturing floor including state-of-the-art of automation system [indiscernible] initial operation. During the third quarter, we also moved into the new ACM Shanghai headquarters.

The facility is also in the Shanghai high tech Zangjiang Science Park, and offer a great work environment for our engineering team. In the US, on October 1st, we completed the purchasing of our new Oregon facility, which including 5,200 square feet cleaning room. We plan to move in early next year. We plan to deliver several tools in 2025 to provide the easy access to major customers for advanced tools evaluation. ACM is building strong footprint in the US, including our own cleanroom, R&D lab and the growing service team. We see this as a great opportunity to participate in the market growth of US semiconductor. I will now provide our outlook. Please turn to slide 10. We have raised our 2024 revenue outlook to be in the range of $725 million to $745 million versus prior range of $695 million to $735 million.

In the middle point, our revised outlook represents a 32% year-over-year growth compared to 28% previously. Shipment activity remains strong and we’re continuing to expect a full year shipment growth rate to outpace the revenue growth rate. Our visibility for the remainder of the year is largely driven by our current order book and the qualification and the customer acceptance of previously shipped evaluation tools for a range of customers. From our perspective, we believe WFE spending in the mainland China will remain at a high level as the country continues on its goal to match the production capacity with end market consumption. We continue to focus on market share gain, new product, and the increased localization to drive our growing objectives in China market.

Further, we are expanding our business to new customers in the US, Korea, Taiwan, Europe, and other Asia markets. Our long-term target is to generate half of our revenue from outside of China. Now let me turn the call over to our CFO, Mark, who will review detail of our third quarter results. Mark?

Mark McKechnie: Thank you, David. Good day, everyone. Please turn to slide 11. Unless stated otherwise, I’ll refer to non-GAAP financial measures, which exclude stock-based compensation and unrealized gain/loss on short-term investments. 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 third quarter of 2024 comparisons or with the third quarter of 2023. I’ll now provide financial highlights. Revenue was $204.0 million, up 21%. Revenue for single-wafer cleaning, Tahoe, and semi-critical cleaning was $161.0 million, up 21.6%. Revenue for ECP, front-end packaging, furnace, and other technologies was $34.6 million, up 35.6%.

Revenue for advanced packaging, excluding ECP, services and spares, was $8.4 million for the third quarter, down 21.0%. But for the first nine months of the year, it grew by 2.9%. Total shipments for the quarter were $261 million, up 23%. Gross margin was 51.6% versus 52.9%. This exceeded our long-term gross margin target of 40% to 45%. For the full year, we expect our gross margins above the high end of the range. This is due to year-to-date gross margins of about 50% and our expectation for gross margin in the upper end of our 40% to 45% target range for Q4. We continue to expect gross margin to vary from period to period due to a variety of factors such as sales volume, product mix, and currency impact. Operating expenses were $49.2 million, up from $45.3 million.

R&D was $24.5 million versus $22.7 million. Sales and marketing was $13.2 million versus $14.3 million. And G&A was $11.6 million versus $8.4 million. For 2024, the full year, we plan for R&D in the 12% to 13% range, sales and marketing in the 7% to 8% range, and G&A in the 5% to 6% range. Operating income was $56.1 million versus $43.8 million. Operating margin was 27.5% versus 26.0%. Realized gain from the sale of short-term investments was $0.2 million versus $0.7 million. Recall that unrealized gain is not included in non-GAAP earnings. Income tax expense was $4 million versus $0.7 million. For the full year, we now plan for an effective tax rate on non-GAAP pre-tax income in the 12% to 14% range. Net income attributable to ACM Research was $42.4 million versus $37.6 million.

Net income diluted share was $0.63 versus $0.57. Our non-GAAP net income excluded $11.9 million or $0.18 per share in stock-based compensation expense. Stock-based compensation expense declined sequentially in Q3, and due to the accelerated amortization for the ACM Shanghai stock option grants. We expect SBC to decline again in the fourth quarter. I will now review the selected balance sheet and cash flow items. Cash, cash equivalents, restricted cash, and time deposits ended the third quarter at $369.1 million versus $366.8 million at the end of last quarter. Inventory net was $628.7 million versus $602.9 million at the end of last quarter. This included raw materials and work in process of $329.8 million and finished goods inventory of $298.9 million.

Finished goods inventory mainly includes first tools under evaluation at our customers. It also includes finished goods at ACM facilities. Cash flow from operations was $11.9 million for the third quarter and $63.9 million for the first nine months of the year. Capital expenditures were $33.4 million for the third quarter, $73 million for the first nine months of the year. For the full year 2024, we expect to spend about $100 million capital expenditures. That concludes our prepared remarks. Let’s open the call for any questions that you may have. Operator, please go ahead?

Q&A Session

Operator: [Operator Instructions]. Our first question comes from the line of Charles Shi of Needham & Company.

Charles Shi: Maybe the first question, I think I heard you talking about the wet clean product portfolio you have right now covers 90% of the overall worldwide wet clean market, which includes all kinds of devices. But I want to ask specifically on 3D NAND, what’s that coverage percentage number look like? Are you able to cover 100% of all the 3D NAND applications?

David Wang: Very good question. Well, actually, as I said, our typical process cleaning will cover almost 90%. And this moment, I want to say, is the only single wafer for sulfuric acid. We’re not fully in the market yet. So, basically, the rest of the tool – and we are either in R&D with the customer. Also, we’re putting in production, right? And even including all this sulfuric acid [indiscernible] of the 3D NAND and also high temperature of the SPM process and also other [indiscernible] process. So we’re pretty fully engaged and regarding this 3D NAND wet process [indiscernible] cleaning.

Charles Shi: So, basically, there’s still some gaps, but you’re engaged. This comment would apply to 3D NAND as well.

David Wang: Yeah, I should say probably by end of this year, we should be qualifying all the process and including – we already put in production existing process, right? So we’ve made a lot of progress.

Charles Shi: The second question I have, I think you said China WFE, you think it will remain at the high level next year, but this is a two part question. So number one, in terms of the change from this year’s level, you will remain at – this year’s already at a pretty high level, right? But I want to understand, when you say remain at a high level, you’re expecting flat to up or what’s the expected range here? That’s one part. But the other part of the question, obviously, with the US election that happened a couple of days ago, obviously, it’s pretty uncertain at this point where the trade policy of the new US administration can go. But does that comment include any of the potential new impact of any of the new tightening or you are assuming the international export control rules remain the same as of today?

David Wang: Okay, let’s come to the first question, right? I should say, last four years, you can see the China WFE market growing quite steadily, and I would say probably next few years, we still have a strong demand in China market. Why? There’s still a lot of memory and also logic and foundry, the IGBT market, They’re still building process for the fab. So real comes next year and it’s hard to give you a number. We’re thinking of something like that and maybe a little bit low, maybe a little bit up. Really hard to really predict at this moment. But I want to say that they’re strong still. In the next few years, the building process can keep going, right? You’re looking at all other foundry business. They’re over time – their utilization of the line is pretty heavy.

So I want to say we’re still kind of very positive, right, about growing in the China market. This is only one day, right? It’s hard to predict. We’re reading whatever – we have to follow the rules of all the countries, all the regulations come out new or changing. And basically, we’re going to need your support. All production ramping [indiscernible] customer in a global.

Operator: Our next question comes from the line of Mark Miller of The Benchmark Company.

Mark Miller: Congratulations, another strong quarter. I’m just wondering, you’ve been consistently posting gross margins above your target range for this year. Sounds like they were expecting the margins to come back down to the high end of the range of December quarter. Your backlog, are we going to go back to your target range in 2025 for gross margins?

Mark McKechnie: David, let me take that if you don’t mind. I think you did – yeah, Q3, another good quarter. Year to date, just above 50%. It really has to do with our product mix and we’ve been – we have a lot of differentiation and we’ve done well on that front. Foreign exchange has helped. But longer term, and we’re not going to give guidance, obviously, for next year, but the general longer-term target remains 40% to 45%. And the mix can change given a broad product line. Our backlog, the margins for that, without giving too much, they’re pretty good. They’re pretty healthy. And so, we’ll leave it at that, Mark. I think we’re sticking to our 40% to 45% target.

Mark Miller: You announced the orders from a US customer for delivery in the second, first half of next year. Any thoughts of where we can expect in terms of your sales outside of China? Is that going to be significantly increasing next year?

Mark McKechnie: I think our business outside of China, obviously, it’s a corporate focus. We believe that we’ve really scaled up our business in mainland China. The model is scale it up near some of these larger customers, these activities that have been going on. And this is where the spending has been and then expand that into the global markets. And we’re planning for good growth in China alone next year. International, really depends on our customers and the evaluation status. It’s kind of see where they are with their projects and what have you. We’ve got a few demos in later stage, a lot of focus from the company. I think this clean room in Oregon is a good commitment. So I think when we give our 2025 outlook range, when we give that early next year, we’ll probably include some, but right now we don’t want to say exactly how much, but we’d expect some contribution next year from the non-China markets. Anything to add, David?

David Wang: Actually, I do see some customer obviously interesting to our cleaning and also a [indiscernible]. And we see that a big potential, especially our SAPS and megasonic and also this Tahoe tool, right, which can saving sulfuric acid up to 75%. So we see a lot of opportunity for our differential product in getting to the global market, right? So we’re expecting those differential product will be more of – in a state of accelerating, right, getting to their customer outside China.

Mark McKechnie: I would add, Mark, just the activity means is good. I know we’re all looking for orders, but we’re getting with our – we’ve got a pretty good sized team, US, Europe, other areas. So we’re pretty heavily engaged with a number of other customers that we haven’t spoken about here.

Operator: [Operator Instructions]. Our next question comes from the line of Suji Desilva of ROTH Capital.

Suji Desilva: Congratulations on the progress here. Maybe following up on Mark’s question there, the global customers that you expect to contribute in 2025, what geography do you think is the nearer term opportunity across Europe, US, Korea, and Taiwan?

David Wang: Yeah, it’s hard to give you that precisely right now. Obviously, we see the opportunity in the US as we have a full advanced packaging tool. With regard to this year, we’re shipping first half of next year. We continue to see that opportunity. We already have a three tool in one of the key logic customer, their evaluation of the product on a different process step. And also, we see other interest [indiscernible] actually in Asia. So we’ll engage with those customer. And next year, we see that [indiscernible] continue, kind of going on with their projection or their plan. So we’re really excited and engaged with this big guy outside China really tried to penetrate our differential product in the production line. As I said, a lot of our tools were offered to the market and get the yield improved and also get the big asset saving, at the same time providing excellent during the particle removing performance.

So we’ll see that as our differential product get accelerated to the market.

Suji Desilva: On the high temperature SPM solutions, it sounds like you have technical advantage there. What are the specific specs that you can come in to compete with the incumbent there? Is it throughput or the more efficient, any color there would be helpful?

David Wang: Actually, let me put it this way. Our SPM product, I have two, right? One is the high temperature SPM single wafer tool which is 170 degrees higher, so big asset, right? And then, this tool actually, we did a breakthrough, as I mentioned before. We can much control our chemical splash outside chamber, so therefore we have a better cleaning environment. And with our cleaning chamber, we don’t need much time spending on the cleaning the chamber itself. So that will give you uptime better, right? And also give the good particle performance. Second one is really Tahoe tool, right? They’re actually targeting lower and middle level temperature of SPM. And this has been our flagship tool and they’re combined batch and single.

And the real performance breakthrough this year is we have excellent particle removal efficiency, right? As I said, 26 nano particle, adding about six particles only. So that’s definitely equivalent to the single-wafer process capability. So with the continuum as improving the filtering system, this tool can be further used into removing one external particle, which is really demand [indiscernible] nodes, memory and DRAM, and also logic. So we see that both tools work in the market in China, also outside China. And everybody – sulfuric acid process, they’re actually very happy about their – with treatment, right? Also handle this level of material in the fab environment. So that’s really what giving a good performance and also the environment, I call it, protection saving for the other fab in the world.

So we see that they’re a bigger opportunity for our Tahoe tool.

Operator: Our next question comes from the line of Edison Lee of Jefferies.

Edison Lee: Congratulations on the great results in 3Q. I just have a quick question because you did mention that the advanced packaging market in China is slowing down. And I think maybe you can actually help us understand whether that should be a leading indicator for finance spending in China? Should we be worried about finance spending in China as a result of the slowdown in advanced packaging in China? So, yeah, how should we think about it?

David Wang: I want to say that is – really, looking at last year, right, and also in the first half of this year, it’s kind of slow. However, we see that a gradual takeoff, right, in Q3, Q4. And we do have other order coming. So you look in other market, in the foundry business, they pick up. I think from now on, they gradually pick up on their – this advanced packaging WFE spending. So we’re a positive, I should say, Q4 and the next year. But I’m talking about past, right? Our revenue we presented last four months and last year, all the tool was shipping. So that’s our view about this advanced packaging status.

Edison Lee: Do you think that the Chinese packaging companies are actually doing something different versus the past? Are they moving into HBM or are they moving into more [indiscernible] type of packaging that requires different equipment? What is happening there?

David Wang: Obviously, that’s quite a different company, right, and there are certain company moving to this high density packaging. And obviously, also, we see the company also moving the panel too. So it’s a lot of people and work on this advanced packaging. I call it the technology and also their process development.

Operator: [Operator Instructions]. Seeing no more questions in the queue, let me turn the call back to David Wang for closing remarks.

David Wang: Okay. Thank you, operator, and thank you all for participating on today’s call and for your support. Before we close, Gary is going to mention our upcoming investor relations event. Gary, please.

Gary Dvorchak : Thanks, David. Before we conclude, I just want to give everyone a quick reminder on our upcoming investor conferences. On November 19th, we will present at Craig-Hallum Capital’s 15th Annual Alpha Select Conference in New York. On November 20th, we will present at the ROTH 13th Annual Technology Conference, also in New York. And on December 4th, we’ll present at the UBS Global Technology and AI Conference in Scottsdale, Arizona. Finally, on December 17th, we’ll present at the 13th Annual New York City NYC Summit in New York. Attendance of the conferences are by invitation only. For interested investors, please contact your respective sales representative to register and schedule one-on-one meetings with the management team. This concludes our call. You may all now disconnect. Have a good day.