ACM Research Inc (ACMR) 2022 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by and welcome to the ACM Research Third Quarter 2022 Earnings Conference Call. (Operator Instructions) Now I will turn the call over to Mr. Gary Dvorchak, Managing Director of the Blueshirt Group, Mr. Dvorchak please go ahead.

Thanks, Lisa, and good morning, everyone. Thank you for joining us on today's call to discuss third quarter 2022 results. We released results before the U.S. market opened today. The release is available on our website as well as from Newswire services. There's also a supplemental slide deck posted to the investor portion of our website that we'll reference during our prepared remarks. On the call with me today are our CEO, Dr. David Wang; our CFO, Mark McKechnie; and Lisa Feng, the CFO of our operating subsidiary, ACM Shanghai. Before we continue, please turn to Slide 2. Let me remind you that the remarks made during this call may include predictions, estimates and other information that might be considered forward-looking. These forward-looking statements represent ACM's current judgment for the future. However, they are subject to risks and uncertainties that could cause actual results to differ materially. Those risks are described under Risk Factors and elsewhere in ACM's filings with the Securities and Exchange Commission. Please do not place undue reliance on these forward-looking statements, which reflect ACM's opinions only as of the date of this call. ACM is not obliged to update you on any revisions to these forward-looking statements. Certain of the financial results that we provide on this call will be on a non-GAAP basis, which excludes stock-based compensation and an unrealized gain or loss in trading securities. For our GAAP results and reconciliations between GAAP and non-GAAP amounts, you should refer to our earnings release, which is posted on the IR section of our website and Slide 12 in the supplemental deck. With that, let me now turn the call over to David Wang, who will begin with Slide 3. David?

Thanks, Gary. Good afternoon, everyone, and welcome to ACM's Third Quarter 2022 Earnings Conference Call. I will start with the new China treater restrictions issued by the U.S. Department of Commerce Bureau of Industry and Security in October. The updated export controls cover equipment and parts subject to U.S. export controls, including items from U.S. and the activities U.S. personnels. Based on our preliminary assessment, the new policy restricts export U.S. parts for tools delivered to advanced node facility or for tools that meet certain ECCN parameters. Some of our shipments will be impacted as our tool currently have 5% to 10% of components sourced from U.S., and we produce some tour in certain ECC categories. Let me provide more detail. First, some of our customers have advanced node facility. Shipments to this facility may be impact due to U.S. export restrictions. At advanced node, the facility is defined as builder production and their restricted technology level occurs. The policy does not apply to other customer building with mature nodes. However, even when they are on the same campus. Second, from ACM Shanghai products need a perimeter of certain export control classification number or ECCN number on the commerce control list. Shipments of this tool may also be impacted if those tools need a part from U.S. This may include our ECB tools that specifically support cobalt metal planning, server furnace products and one of the new platform products that we plan to introduce it does not include our cleaning tools, most of our ECB tools, our WLP tools or other new platform products we plan to introduce. Third, the policy restricts U.S. purchase from facilitating shipment and servicing products involved with advanced nodes or listed new ECCN number. We have no U.S. employee in our Shanghai and Korea R&D teams. Therefore, the impact from the new U.S. person policy is minimal. We have, however, implemented compliance protocols concerning U.S. person, involvement in facilitation, shipment and services supporting activities. We believe the new policy will not impact shipment of ACM Shanghai tool that do not have USD parts or do not include the strict activity of U.S. persons. And we believe that ACM Shanghai tool that are not in the restricted ECCN category can be shipped to the mature nodes even with the U.S. Post and U.S. person involvement. I will now move on third quarter highlights. PLease turn to Slide 3. Our third quarter results were a record for the company. Revenue was $134 million, up nearly 100% driven by our flagship (inaudible) tools and strong growth from our new ECP and furnace product, which is stable. Shipments were $163 million compared to the $99 million last year. Gross margin was 49.3%. GAAP operating margin was 23.7% and non-GAAP operating margin was 25.1%, and we ended the quarter with $473.2 million of cash equivalents, restricted cash and time deposits. From first 9 months of 2022, revenue grew 70%, community tool grew 56%. ECP and furnace tool grew 316% and contributed to 20% of the sales. We had 3 10% customer, which together accounted for over 30% of our sales versus 66% mix for the same period last year. We made good progress with our initiative and major semiconductor manufacturer outside maiden China. The evaluation of the 2 canine and the U.S. factory of the large U.S.-based manufacturer is going well, and we are gaining traction with the potential new customers in Europe and other regions. In Q3, we launched our first ARD furnace product. ALD is one of the fastest-growing application for manufacturing and advanced nodes in memory and logic, making their critical new capability for our furnace portfolio. We delivered our evaluation tool to a top-tier China-based foundry manufacturer and targeting target qualification in 2023. This is the first series of furnace ALD tools with a product line extension ahead. We expect our furnace ALD product to making good contribution starting next year with ALD technology expected to represent about half of the total furnace market. Further ALD offers significantly higher throughput than traditional single wafer ALD tools and present a compelling value preparation. We believe that ACM's ALD furnace with a proprietary technology can narrow the performance gap between furnace ALD and their single-wafer ALD. Next, we plan to grow our operations with investment in new facilities Construction of our Lingang production and R&D center is in full gear and remains on track for initial production in the middle of 2023. I also want to announce, we are close to purchasing a new headquarter in Zhanjiang, Shanghai, the City Valley of China. We are committed to the China market and this new headquarter will provide the stability for our employees and help us attract new talent. We are also in final stage of selecting a site to expand our R&D and production facility in South Korea. Lastly, we are on track to double our addressable market opportunity with upcoming introduction of 2 new product category planned for later this year. Now I want to provide more thoughts on the impact to our future business from new U.S. restrictions. We expect the temporary pass as some customers as industry adjusts to the new policy. ACM Shanghai is committed to complying with new regulation and meeting the demand of its customer base. We are actively managing our supply chain to source compliant components to ensure maximum shipment of our tools. For mature nodes, we expect a fairly quick recovery. Most of our business has been for 28-nano and above logic devices, 96-layer or less 3D NAND and 19-nano and above DRAM. Looking forward, we expect our China customers to continue to add or even speed up capacity as the mature nodes. This is because mature nodes made in China is much lower than China's market consumption, and we are strongly in position to participate in this opportunity. For the month notes, we remain committed to participating in that market in full compliance with the new U.S. export control. ACM is focusing more effort to bring its advanced technology to leading edge fabs of global customers. We are making good progress with U.S. and European customers and expanding our global sales and support teams. We are also accelerating our R&D and production facility in South Korea to be close to several major semiconductor players and provide a second site to supporting worldwide customers. I will now provide our outlook. Please turn to Slide 6. As a result of new U.S. trade policy and supply chain constraints, we have lowered the upper end of our full year revenue outlook. We now expect 2022 revenue in the range of $365 million to $385 million versus the previous range of $365 million and $45 million. The range of the company's 2022 outlook reflects, among other things, the impact from the new U.S. trade policy, supply chain constraints, varies spending scenario for the production ramping of key customers and the timing of acceptance of first tool on the evaluation in the field and assuming stability with respect to the COVID-19 pandemic in China. Now let me turn the call over to our CFO, Mark, who will review detail of our third quarter results. Mark?

Thank you, David. Good day, everyone. Please turn to Slide 5. Unless I note otherwise, I will refer to non-GAAP financial measures, which excludes stock-based compensation and unrealized loss on trading securities. A reconciliation of these non-GAAP measures to comparable GAAP measures is included in our earnings release. I'll now provide financial highlights for the third quarter. Revenue was $133.7 million, up 99.5%. Total shipments were $163 million versus $99 million in the year ago period. Revenue for single wafer cleaning tools, which includes Spasibo, Tahoe and semi-critical cleaning was $99.7 million versus $49.5 million. Revenue for ECP, furnace and other technologies was $24.5 million versus $8.2 million. Revenue for advanced packaging, excluding ECP, services and spares was $9.5 million versus $9.4 million. Gross margin was 49.4%, up from 44.5% in the prior year. This exceeded our normal expected range of 40% to 45%. The increased gross margin versus the prior year period was primarily due to a higher mix of ECP, frontend packaging, furnace and other technologies and a positive impact due to a change in the (inaudible) to U.S. dollar currency exchange rate. We expect gross margin to continue to vary from period to period due to a variety of factors such as sales volume, product mix and currency impacts. Operating expenses were $32.6 million versus $16.7 million, higher R&D due to tools built for product development, additional engineers and other factors, together with higher sales and marketing due to promotional tools and personnel costs contributed to the growth versus the prior year period. Operating income was $33.5 million versus operating income of $13.1 million. The large increase was due to higher gross margin and leverage in our top line. Operating margin was 25.1% compared to 19.5%. Unrealized loss on trading securities was $5.3 million. The loss reflects the change in market value in the shares of SMIC, which are owned by ACM Shanghai. The value is marked to market quarterly and is excluded from the non-GAAP results. Realized gains from sale of trading securities was $1.1 million due to the sale of a portion of SMIC shares, which generated net proceeds of $4.5 million. Other income expense net was $7.2 million. This reflects a $6.4 million due to gains recognized from the impact of exchange rates on foreign currency denominated working capital transactions versus $0.3 million in the year ago period. Income tax expense was $10.5 million compared to a benefit of $0.3 million in the year ago period. The effective tax rate for 2022 has increased primarily to a new requirement to capitalize and amortize previously deductible research and experimental expenses under IRS Code 174, which became effective on January 1, 2022. The company's tax provision for the 9 months ended September 30, 2022, assumes the rule will not be overturned and is based on capitalization of all R&D expenses for tax purposes. Net income attributable to ACM Research was $28.2 million versus net income of $12.4 million in the year ago period. Net income per diluted share was $0.42 compared to net income per diluted share of $0.19 in Q3 of 2021. I will now review selected balance sheet items. Cash, cash equivalents, restricted cash and time deposits was $473.2 million at the end of the third quarter versus $468.9 million at the end of the second quarter. Total inventory was $327.8 million at quarter end, up from $288.1 million at the end of the last quarter. This included finished goods inventory, $109.2 million, work in process is $53.5 million and raw material of $145.1 million. Net cash used in operations was $2.2 million. CapEx was $13.2 million due to construction in Lingang and other facilities. For the full year, we plan to spend $30 million to $35 million in total CapEx for Lingang and other facilities. There may be additional CapEx in the fourth quarter should we close on our new headquarters in (inaudible). That concludes our prepared remarks. Now let's open the call for any questions that you may have. Operator, please go ahead.

Thank you. (Operator Instructions) At this time, the first question will be coming from Quinn Bolton of Needham & Company.

David and Mark, congratulations on the strong near-term shipments. Obviously, big questions, I think, for a lot of us on the line are the impact of the export controls and it looks like it's certainly having an impact on the fourth quarter as you take the midpoint or the range for 2022 down. I guess a couple of questions. One, as you look at 2023, I know you haven't given '23 guidance, but could you give us some sense what your what the impact of the new export controls might be on 2023? Is that $50 million? Is iaffectedt $100 million of potential business that could be ? And then the second question is just can you give us some sense of the split between what percent of revenue is affected from shipments to advanced facilities in China, the DRAM, the 128-layer NAND versus how much of your how much of the impact is due to parts that contain or sorry, tools that contain U.S. parts and/or the new tools that are affected by the ECCN classifications sorry for the long questions, but hopefully, you get sort of what I'm driving at.

Okay. Well, let me cover the first one and maybe market add on, right. I mean our revenue projection for the next year forecast normally give a January time line. At this moment, I think it's still too early. Probably you can't give too much detail at this moment. I want to mention here looking at this restriction, actually, I can see that definitely some advanced nodes production plan will probably get slowdown. However, as I mentioned in the script, China has a lot of mature nodes and chip, the consumption in the market, China import almost 60% kind of global of the chips. So for those mature nodes, I think would be a big potential and also a lot of electrical con and also a lot of commercial products using the 20NANO and 45NANO right? So we see that it will still continue to grow, even possibly speed up and this potential of the fab buildup. So also, our technology, most at this moment will service for those nodes to be proven, and we are positioned in this kind of market. So therefore, I would say that the mature nodes will continue to grow and even speed up and that definitely some advance get slowdown. So combination put together, I still say ACM is still in the growing pace and in the China market, right? That's I view the for the market that we're talking here. Then at the same time, we have to also increase our 2 new products online. And that's probably introduced very soon by end of this year. So with the new product added on to our product portfolio, we have also multiproduct in the market, that will give us more of, I call it, revenue stream probably in 2004 and for the 2 new products. And also recent announced this ARD of the, I call the furthest product, and that's also give us revenue in the 2023-4. So we'll still keep our confidence and what do you have in the market in China. We have a very, I call the R&D engineer and also together with the Korea engineer and also very preparation for the real mature nodes participation in time growth. But meanwhile, also, we are trying to expanding our one node, in the international market, right, especially we have building our Korean fab and Korean R&D facility. So for that reason, I will say, we still can continue R&D and for the service global customers, and we want to sell a differentiated product and to servicing for the entire industry. [inaudible] you the first question.

I think, Mark, you want to cover a second question? Or do you want anything to add on that?

Yes, I can thanks, David. Yes, I think Quinn's second question was about what percent of our tools were going to advanced nodes. And then I might it's hard to measure, but it's a pretty small percentage, right? And so the majority of our business has been to the more mature nodes. But I think as everyone knows, ACM is in a good position where we've got some flexibilities, we can ship a lot of products or others can't. But we're going to be impacted by the overall spending at our customers, right? So for instance, if they can't get certain tools from other players, they're spending, we would expect it to pause for a bit, as David mentioned in the prepared remarks. So I guess kind of bringing it all together, looking out to 2023, as David noted, we're not we'll give the guidance like we always do it at the beginning of the year. But we're planning for some growth. And we'd expect there to be a bit of a pause in the first half as the industry adjusts and works to get their licenses. And as the customers work on, for instance, fabs that buildings that don't have the mature nodes, right? And so they can have almost what you would call a compliant fab. So we're watching that closely, but we'd anticipate a kind of a pause from some of the bigger customers, some of it hit in this quarter and some of it carrying through into the first half of the year. But as David noted, we'd expect the spending in the industry to start being able to support the mature nodes that those customers as you move through the year next year.

Great Just Let me add on our U.S. parts ratio. We are product normally have a 5%, 10% U.S. components, right? So clearly, if we're not where actually our Canadian product is not the ECCN category. So for a major revenue and we still can use in U.S. parts and also first involved to sell those parts to the mature node customers, right? As a matter for those properly, our Chinese engineer or Chinese staff, their activity to building tool for advanced nodes. And then we have to -this moment cannot get any parts on the U.S. So they probably have to choose into other compliance with supplier, can be any other area. And we do have some parts in China locally. Yes, something will take time, but as I said, this can be taken probably a year, maybe a year to and however, it really depends on how their vendor and also the commercial supplier, how the faster quickly reaction to this change. I should say, I still consider the U.S. box impact it's kind of a compared to other guys were pretty much minimized, but we will come back.

And one final quick clarification, Mark and David, for the parts that are under the ECCN classifications, those are the tools where you cannot source U.S. components. Is that right or would only be, for instance, the coal ECP tool, not the rest of the ECP line? And then I think you mentioned 1 of the 2 new platforms may also fall under ECCN. I'm just trying to get a sense what shipments for ACM are affected and where you are free restrictions?

Yes. Actually, like you said, this is a cover plain cobalt, right? It's really targeting probably 7 nonlight. And in this moment, I do not expect higher revenue in China, obviously. So a lot of like 20 to none or above, those nodes is all copper plated even in the 6 nano 40-nano (inaudible) is still colbalt plate in other words. So I should say, our colbalt plating is still okay, and not in ECCN and (inaudible) in there, right? Our new product, we're going to introduce that need ECCN right? So in this case, we have really sold the other U.S. parts out. And as I said, again, even a new our new product, we talk about ECCN, U.S. pad probably, say, probably 10% range, right, over like that. So it still can be possibly found other alternative choice. And obviously, either qualify needed to be and working with the vendor and get those tend to be quantified, right? That takes time. And however, we think install.

100% Thank you David, Thank you Mark

Yeah thanks Quinn

Thanks Quinn

Thank you. (Operator Instructions) Our next question will be coming from Suji Desilva of ROTH Capital.

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

Okay. Good. Actually, the Korean and we started Korean our subsidiary in 2017, right? And since this we can hire people. And today, we have about almost 110 employees in Korea and in which 60% was R&D so Korea have about 3,000 square meters facility, actually, we can manufacture at our convenient tool and the future probably can also manufacture colbalt plating tool. And also we have a dryer the furnace, right, ALD tool and most ports also made in the Korea and some Portman in China. As time going on, we do have 2 new introduced products and we're not given name yet. And those 2 new products also can be manufactured in Korea. So I think Korean R&D manufacturer base or by the we also also finding the one land in the final phase of the government prove license. Of that, we're building also another second manufacture center in Korea, right? So with this the preparation, I think we're well positioned to have a Korean to make a tool, of course, kind of sell back to China? And also, we're also prepared in the tool made in Korea to be sell to the Taiwan and they also sell to the, I call it U.S., European market, right? So at this moment, I think we have 2 manufacturing centers, 1 in China and in Korea and also we'll do more of a more effort and to work with the Korean top player and their customer here and also due to the R&D research and advanced nodes, right? So that will be the real second center and for us, expanding the global market. Mark, anything you want to add on that?

No, I think you hit it David. I mean the, I guess maybe I'd mentioned that you're just having a second production center, I think, is pretty attractive to some of our international customers. And so that will help us drive our international business.

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

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

Thank you. One moment, while we prepare for our question our final question will be coming from Christian Schwab, Craig Hallum

Can you just Mark, can you just tell us where all the cash is in the use of funds and whether we can bring some of that back to the United States, the way to do a meaningful stock buyback at some program. Can you just refresh us on the use of the significant cash balance?

David, maybe I'll ask Christian Yes, go ahead

I'll cover something that maybe you can sell with cash, right? Okay? Well, basically, the cash we have in the most will proceed. We have market IPO last year, right? And those money is belong to a subsidiary. You do have other well, 17.5% of I mean, minority investment there. So we cannot directly bring cash back to their major shareholder at USA, right? So we cannot do that. However, as time is going on, we have a profit generated in China, and we do an well, we can bring some dividends back to the U.S. And last year, we didn't do anything, but we're still considering. And this is one option and putting cash back to the U.S. not necessarily real buyback share, very important when we're trying to enhance our R&D and also sales effort and to exploring further U.S. and the European market, and that's why they will consider. Anything else, Mark, do you want to add on that?

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

Great questions. Thanks, guys.

Thank you

Thank you. (Operator Instructions). Our next question will be coming from Robert of Neocis.

Can you hear me?

Yes. .

Yeah hi Robert.

Congratulations on the good results. I just want to get some clarification on the percentage of U.S. parts and your different types of equipment. Would you be able to clarify that, like, for example, what percentage of U.S. parts are in your wafer tools and in other tools?

Yes. And typically, I said, between 5%, 10%, depends on the cleaning tool type. And we do have some heater and some kind of pump, right? And those parts we're purchasing from the U.S. And so about 5%, 10% in terms of value.

Okay. Got it. And so do these parts need to get licenses? Or is that is that my understanding? Is that understanding correct?

Yes. Well, it's actually the 2 categories, right? our tool is not ECCNs (inaudible), which is not ECCN yet, right? and also this is not ECCN. And also we'll ship the mature node customer facility. And for those portions of the tool, we do not need the our license, okay? The only tool you need a license is for advanced nodes and also some are tool which in the ECCN number, which is a copper cobalt plated and also some ALD tool. Those tools, if you're using (inaudible) surpass .

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

Yes, above mature nodes to make sure.

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

Did that answer your question. Robert? Hello Robert

I think we lost Robert Yeah.

(Operator Instructions)And we have another question coming in from Robert McKay of Blue Lotus

Can you guys hear me now?

Yes.

Yeah I lost connection there in the public call. I'm sure someone else took notes. Sorry, I didn't catch it, but I'm sure some else took notes. So I guess my next question then would be what about like the U.S. headquarters, does that complicate things for your business? Because I understand ACM research is headquartered in the U.S. Of course, you have the Chinese subsidiary. I was just wondering if there's any kind of negative impact from your specific kind of business overview

So you want to see impact in the U.S. impact in China. I want to clarify your question.

Yes, sure. So let me just clarify. So I just meant in terms of the BIS rules, I was just wondering if there's any kind of impact from the fact that your headquarters are in the U.S. Does that let me think of how to phrase this is does this make you subject to any extra kind of regulation in terms of the BIS rules due to your U.S. headquarters.

Okay. Well, that's a good question. At this moment, U.S. headquarter basically is actually only conducting sales and marketing, right? And for the tool in the U.S. and Europe, right? And so for those activities, that are promoting our tool made in China or made in Korea and to the U.S.A. or to the European market, I should say nothing impact there, right? Because this ever control or only for tool goes to China, right? So I don't impact anything outside of China activity.

Right. Okay. Got it. Got it. And then so the other question was about your your ECB tool. So I understand it's only for the cobalt plating for ECB. And so the other tools that you ship that are ECBs just like you were saying for Wafer (inaudible), there's no license requirements for those mature tools that are not for , for example, under 28-nanometer that are not for cobalt wafer clean sorry, colbalt ECB, is that correct?

Yes That's correct. Yes. So you are correct.

Okay. And then for Furnace, I think it also applies to furnace. Does that mean that furnace (inaudible) going forward there would be no revenue stream for furnace because I think from your remarks

Well Actually go ahead. Yes. And like you said, definitely our furnace ARD is in that category, which is easily category. And for those tool, probably we can either import any parts from the U.S., right? And second thing is we can either also have a U.S. person directly involved, right, and servicing infusion or the shipments, whatever altogether. So we this is the case with we devote all our responsibility and sales and marketing, everything decision to our Chinese team, and they have a CEO, they have sales of AP operation, people there. So they take care, right? There's different cells, but they are using non-U.S.A part as a person kind of involved

Got it. Okay. Fair enough. And then so for that furnace tool then is there any China or any Chinese suppliers that could supply parts that you need for that to make it elastically or would that be against the recognition

. It's a good question. Actually, the parts can be using or for using maybe other countries, some parts, we can see from Europe, right, and some parts from Korea and some are from Japan. We can fund some part also in China, too, right? So it's but you need some kind of qualification qualify those parts. That's what we talk about ..

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

I should say we're still evaluating that right now. And we're still seeing some parts possible can change quickly. And some parts, we have to real work with the supplier then to qualify the parts and also working the customer to qualify the tool, right? So we don't ever decline and now they're just 1 day switch, right? But then normally, our qualification process, I should say, if we change the past and 6 months or 1 year, that's typical time, you need to qualify, right? That's the typical timing I can qualify new parts.

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

Thanks Robert

Thank you.

Thank you (Operator Instructions) One moment, we have our next question is coming from Chaolien Tseng of credit Suisse.

Do you hear me?

We can hear you.

Okay. Got... So my first question is regarding. I understand that for mature 12-inch in logic side, the market side, market potential is very big in China. But I'm also very curious how about first, like, I mean, 96-NANO and 19-nanometer DRAM, do you expect Chinese fab customers will continue to expand over the next few years. I think one of the argument is such because for this RAM and DRAM products, maybe because of the cost structure issues. So the market is very worried that this potential China customers may not continue to have good expansion over the next 1, 2, 3 years?

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

Alright. Thank you, David.

Another question from me is that so over the past few months, after the I mean, the Shanghai finish kind of finished the last one. On the product development on the R&D side, I mean, how do you see that kind of ahead of expectation in the past 2 quarters versus what's kind of, I mean still slow in terms of the new product development. Another thing is that, could you share a little bit more on the wafer cleaning our (inaudible) tool progress?

Okay. Well, new product. And I think we are coming for almost like a 2, 3 year on effort, right? They're the 2 new products, new category product, which is a real double our addressable market. It's a real good progress potentially, right? We're in the final stage and the testing and also do the, I call it, pretty much want to make sure our testing is okay, meet customer requirements that we ship. I still think we're possibly shipping by end of this year to new products to the customers. And regarding the still tool dry clean product, I think we're doing also very well, right? This is a critical product and for all the high spec ratio drying process. And so our Chinese engineer is working very hard and try to bring this market to the market.

And maybe one more question is back to the gross margin side because I missed the first few minutes. I'm not sure if you or Mark already discussed the gross margin on ECP and furnace versus the corporate average because the second quarter gross margin is pretty good. I'm just thinking about, is there any potential is there any possibility that looking ahead, our gross margin will be more on the higher end of our long-term range... Thank you...

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

Okay. Got... Thank you, David

Thank you

(Operator Instructions) the next question will be coming from Charlie Chan of Morgan Stanley.

Thank you. First of all, thanks for walking us to, yes, these are a very challenging environment, and thanks for all the clarifications. So my first question is really about the cyclical impact. I know China still needs to build to local efficiency, right? But if you look at outside of China, essentially all the foundry fabs memory fabs are cutting CapEx by at least 20% into next year. Do you think that's going to impact your plan in mature nodes? And do you see any material nodes customers are restoring some CapEx plan recently?

Yes. Actually, Charlie, I really couldn't say in the real near future, right, let's say, next quarter 2 quite kind of retail. But I just in the call a high-level point of view, as I said, China still consumption a lot of mature nodes and products, right? And also recent electrical car even consume more of the power device. So a lot of our mature nodes products, which is still not there enough or made in China, right? And so as at that point of view and China is going to really increase more of a mature node production and they meet their own requirements. So from that point of view, I can see that in the next few years, there's still a lot of fab is going to build, right, to meet such a requirement because most the market right now is in China, right? That's a real reason market is here. So they can build the fab, they can sell the product. So from that point of view, I still have a very positive view for China market, building mature nodes. As a matter is the next 1 quarter, 2 quarter or 3 quarter probably access more of the market next year. But from the long view, I think there's a lot of facts to build up also the electrical car driving, right? It's real high development in China, that's a power device can be another bigger potential market we're looking right now

I see... Yes. I totally respect your view. But just FYI, we give us some analysis before, right, meaning CapEx long term still correlated with the free cash flow. So from what we are seeing right now, there's some wafer pricing pressure in mature nodes. So I'm really worried about free cash flow could decline, and that will at some point, we'll catch up the CapEx plan. But anyway, I do agree that long-term others are still outside for China as a mature notes. And my second question is about your efforts or your the entire supply efforts to minimize the U.S. technology dependency. So you do you said that you want to qualify some U.S. components on Japan, Germany or even China locally, right? I think that, that should be the way to do. But my question here is that how do you do or customers complete the production line without the critical tools right now major ACML's AP tool or applied materials at AP tool or land research ICP, et cetera, right? Meaning because those companies or countries still want to more comply with the U.S. rule. How do you still sell your tools if you customers are (inaudible) critical products.

Okay. Let me clear that..

Did I miss anything?

Yes. Well, let me clarify that you mentioned for the advanced note of mature nodes...

Advanced nodes because the (inaudible) nodes, I think it should be fine, right, no made from the exposed growth perspective or technology perspective, but advance nodes is something that I'm asking.

Yes. I think we do anticipate the mature nodes will slow down, right? A lot of like you said, the critical parts and also critical tool, right, is made in the U.S. right now. And so those systems is hard really easily find another replacement tool, right, other even in Japan or in Europe. And so that can be there through down. I agree with that. So we see that it's really we are more focused on the mature nodes. And at the same time, we're also focused on the international market with advanced nodes too, right? And like ACM has differential products, we're not only trying to sell to 69 or 40 nano. We want to also sell to the 3NANO or 2NANO, right? So we're going to also focus in the marketing outside China for the advanced nodes. And this way, we can have a differential product and get there into the global market.

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

Okay. Let me answer the first question. I leave the question second for the Mark to answer. Okay. Well, you mentioned material node I think ACM real position for them mature nodes, they give you even coming? And we now can do mature node cleaning almost 90% or above, right? Also, we are launching almost 2 years ago, auto bench product, right? So at this moment, I think we're very well positioned for those mature nodes. Plus, we do have LPCVD, those kind of to come out and copper plating obviously needed for mature nodes. And also, we do have 2 new products, which will also have a huge market contribution or market I mean potential for the mature nodes. So in terms of a local competitor, I also this way, customers still choosing not only stay low price. And if you look at the mature nodes, there's also too difficult to make. And also for the customers who want to run faster for their mature nodes production, they got to have from the part or the tool that can use the first, right now to qualify one vendor after another. So I still think that this semiconductor is not easy for any tool player, customers probably like 1 or 2 players, maybe maximum 3, maybe 2 is good enough for them to choose. If we've got a 3, 4 different players and for the same product, it's really focusing their R&D effort. They make a chip, right? So we are pretty comfortable on our position, our technology and depth and also our customer relationship and also our commitment, right? Also multi-10 20, over 10, 50-year relation with the customer. So we are pretty okay with our competitive position in China. Mark, maybe a second question for you.

Yes, you bet. I think the question was about the operating margin kind of outlook. So as you know, we've talked about this before. But look, we're a technology company. We believe there's a lot of growth ahead of us. We certainly are still targeting that $1 billion revenue target over the longer medium and longer term. So we're planning for growth. For next year, of course, David mentioned, we're not guiding yet for next year. We'll talk about that on our Q4 call. But we're planning for growth. And in general, the operating margin, it depends on the overall top line. And so we just did 25% here in Q3. If you're depending on what kind of revenue you'd be looking at for next year, we'd like to have kind of a floor of a 10% annual level. So with modest growth next year, that would be kind of a reasonable target. And if any with good growth, we hopefully would see some leverage.

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

I'd call that a target. Yes, we'd call that a target. I mean, it depends. There's a lot of factors we're going to invest in a given year. But we generally have kind of a 10% annual operating margin target.

Okay. Okay. Fair enough. Thanks for all the interest David and Mark.

Okay. Thank you Charlie

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

Hey Mark

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

Okay. We're I should say there's probably, I should say, there's a parts, right, where and those parts we are buying are U.S. parts, right? And so that will be not the ship with the people or you have the founder different other source, like compliance source. That's the portion of our delay of shipments, right? That's something push off. And also, we still do have some constraint even from non-U.S.A. parts, right? It's a really tight control for the constraint of the supply chain. So that's all maybe put the 2 things together, thus impact our revenue in Q4.

You indicated the restrictions would impact your ECP plating tool, did you also say furnaces?

For will be specific, especially for ALD, right? It's really dependent type, right? So it's not all for us

Okay, some from (inaudible) and just one final housekeeping question. What was stock-based compensation?

What was the question Mark.?

What was the stock-based compensation...

Based comp... It's $1.9 million for the quarter. Yes.

Okay

Yes.

Thank you, Mark

(Operator Instructions) There are no more questions in the queue. I would like to turn the call back over to David Wang for closing remarks.

Okay. Thank you, operator, and thank you all for participating on today's call and for your support.

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