ACM Research Inc (ACMR) 2020 Q2 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by, and welcome to the ACM Research Second Quarter 2020 Earnings Conference Call.

(Operator Instructions) As a reminder, we are recording today's call.

If you have any objections, you may disconnect at this time.

Now I will turn the call over to Mr. Gary Dvorchak, Managing Director of The Blueshirt Group.

Mr. Dvorchak, please go ahead.

Thank you.

Good morning, everyone.

Thank you for joining us on today's call to discuss second quarter 2020 results.

We released results after the U.S. market closed yesterday.

The release is available on our website as well as from Newswire services.

There's also a supplemental slide deck posted to the investor portion of our website that we will reference during our prepared remarks.

On the call with me today are our CEO, Dr. David Wang; our CFO, Mark McKechnie; and Lisa Feng, the CFO of our operating subsidiary, ACM Shanghai.

Before we continue, please turn to Slide 2. Let me remind you that remarks made during this call may include predictions, estimates or other forward-looking information, other information 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.

Also, certain of the financial results that we provide on this call will be on a non-GAAP basis, which excludes stock-based compensation as well as losses relating to a change in fair value of a financial liability.

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.

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

Thanks, Gary, and welcome, everyone, to today's call.

Before we discuss our second quarter results, I want to briefly comment on the COVID-19 situation, which continues to impact families, business and market openly.

I would like to recognize the great effort of our ACM team as we have adopted a new working environment and redesigned our workflow.

Since our last quarterly report, we have seen a full return to normal activities in our Asia operations, with nearly all of their restrictions within Mainland China and Taiwan and Korea now lifted.

Travel in and out of China is still restricted, but we have been able to work around to mitigate any potential impact to our business as of yet.

With all that, we had another very busy and very productive quarter with good financial results, new product activity and solid progress on our strategic initiatives.

We are pleased with our financial performance.

We delivered revenue of $39 million, up 35% year-over-year.

Revenue in the quarter was evenly split between our 3D NAND customer and our 2 foundry customers.

Shipments were $45 million, up 36% year-over-year and a strong rebound from the pause in Q1.

We delivered good balance of growing versus profitability, with almost a 50% gross margin and 21% operating margin.

We remain committed to delivering profitable growth as we continue to invest in R&D for new products and global sales and marketing.

We ended the quarter with $86 million of cash.

This includes $59 million of PE funds received by ACM Shanghai in connection with its listing on the Shanghai Stock Exchange stock market, which we released from voluntarily restricted cash.

The quarter end amount was net of $50 million of income payments for the purchasing of the [CPE] land right to build our new facilities and employee dormitories and $40 million investment in SMIC's stock market IPO.

I will now discuss recent operation highlights and customer activities.

Tahoe continue to gain traction in the market.

In Q2, we delivered our second Tahoe tool to our lead customers and recognized revenue upon shipments in the quarter.

During the remainder of 2020, we expect to deliver another Tahoe tool to a lead customer and to deliver [demo force] to several other customers for evaluation.

We are also seeing good momentum with our ECP map program.

The ECP map is a front-end copper plating tool equipped with ACM's proprietary technology to deliver pad better performance.

I'm happy to report today that in the second quarter, we achieved acceptance and recognized revenue for our first ECP map front-end tool.

And in July, we already delivered additional demo tools to another leading China-based foundry.

At Santo China [June], we introduced our Ultra C SAPS-VI tool, which is the latest addition to our Ultra C SAPS cleaning product family.

The SAPS-VI supports the increased sales demand of our DRAM and 3D NAND flash customer.

The SAPS-VI feature 18 chambers versus 12 chambers for SAPS-V but come with the same tool ways and slightly increased lens to allow for plug-and-play integration into existing production line.

I'm excited to report that we received a conditional purchase order for our SAPS-VI first tool to supporting production ramping at a key memory customers.

We expect to ship the tool in the third quarter.

We remain focused on our goal to expand beyond our current base of major customers, which are these in Slide 4. Yesterday, we issued 2 press release that evidence our significant progress in our business development efforts.

First, we announced a total of $36 million of purchase orders and participating in final state of bidding process with 2 new China-based customers that manufacture analog and power IC devices.

Analog and power IC devices are growing markets in China, with rapid growth drivers including 5G, electric vehicle, et cetera.

ACM will supply a range of our newly introduced semi-critical tools, including our scrubber, backside wafer etching tool, auto wet bench, our SAPS-II cleaning tool and our copper interconnect ECP map tool.

We expect to ship most of those tools in the second half of 2020 with acceptance and revenue more likely in 2021.

This customer choose ACM due to our technology leadership and benefit our R&D and production capability in China.

We believe the proximity of this customer to our new Lingang facility can lead to a strong long-term collaboration for future business opportunities.

Second, we announced delivery of our SAPS-II tool for R&D to U.S. demo lab of a leading global semi-[cap] equipment OEM.

This is an exciting development and a major milestone for ACM as it marks the first delivery and installation of ACM's Smart Megasonix technology in the U.S. Our SAPS technology is being evaluated for its ability to complement this OEM tool.

It was to enable OEM to deliver better performance with the own customers and more advanced nodes.

We have begun installation of SAPS-II tool in the lab with the support from our U.S. and international service team.

We view this installation as a major development for ACM as we extend our market reach from Asia to North America.

As we have said in previous calls, we are working closely with one potential customer in North America, and we believe, very major -- every major semiconductor manufacturer can benefit from our technology.

Now let's turn to Slide 5. This represents ACM's view of market opportunity addressed by our 4 product lines.

Our available market starting with our core single-wafer cleaning product, SAPS, TEBO and Tahoe and our semi-critical cleaning products.

We estimate these tools altogether address about 80% of the $3 billion wafer cleaning market for $2.4 billion market served by ACM cleaning products.

We estimate that our other newest products can add a $2.6 billion opportunity with $1.6 billion from vertical furnace and about $5 million each from ECP and SFP products.

ACM is focused on gaining market share by expanding our product line and winning additional new customers.

Our current road map extends many years in the future, with a strong commitment to expand our market opportunity with new products.

Now I'll update on several major strategic efforts for 2020.

Please turn to Slide 6 for discussion of our production capacity.

In early May, we finalized agreement to acquire land rights in Lingang region of Shanghai, 30 miles from ACM Shanghai headquarters.

This will be the future site of our fully funded R&D and production facility as shown on Slide 7. We had a groundbreaking ceremony on July 7 to mark the start of construction for the facilities.

The new 1 million-plus square feet of R&D and production facilities will incorporate [steel] art, metrology tools and ACM's own family of our process tool for R&D and custom demos.

It also includes leading edge manufacturing systems equipped with advanced operation technology.

Importantly, we will boost our production capacity by 5x versus the current level.

We expect to begin initial production in later 2022.

Now a brief update on ACM Shanghai stock market listing.

We submit ACM Shanghai IPO application in later May.

Application is now in a comment period -- phase with Shanghai Stock Exchange.

If all goes to plan, we continue to expect to pricing IPO by year-end.

Finally, I would like to discuss our investment in connection with SMIC's IPO on stock market.

We invest RMB 100 million or USD 14.2 million to participating in partnership form to purchasing IP share of SMIC.

The partnership used all of the funds it risked net of expense to purchasing share of SMIC at IPO price of RMB 27.46 per share.

SMIC's shares start trading on the stock market on July 16 and raised more than USD 6.6 billion.

We congratulate SMIC on stock market listing and offering.

On August 4, SMIC announced a collaboration framework agreement with the Beijing Economic Development Zone (sic) [Beijing Economic-Technological Development Area].

For Phase 1, they will invest $7.6 billion to build a 28 nano and above node fab with capacity of 100,000 wafer per month.

We are honored to be a valued supplier to SMIC, and we are working closely with both their 4D nano and 28 nano teams and participating in the fab expansion in Shanghai and Beijing.

We expect SMIC to become one of the top 3 customers in the near future.

Before I turn it over to Mark, I would like to discuss our 2020 outlook.

Please now turn to Slide 8. Looking forward, we are excited by our business opportunities and remain optimistic about our future.

Let me share our current outlook.

Since the first quarter, we have received improved indication for the remainder of the year.

We have a strong Q3, good visibility through Q4 and orders now built into the first quarter of 2021.

Our visibility is supported by firm orders, customer forecast and tool awaiting acceptance.

Accordingly, we have updated our full year 2020 outlook.

We expect revenue to be between $140 million and $155 million, upper from the previous range of $130 million to $150 million.

The revised revenue range represents 37% annual growth at mid-point.

Our outlook is based on several key assumptions.

First, the COVID-19 situation further improved in China and stabilized in the rest of the world.

Second, Chinese semiconductor industry fab investment continues.

Third, the revenue range assumed good growth from foundry and NAND customer and muted DRAM recovery.

We believe our updated guidance reflect that we are successfully executing our strategy.

We are investing R&D and enhance current product line and to develop new products.

We are building a global sales and marketing resources to penetrate new customers in new regions.

We are balancing near-term profitability to invest in new products to increase our total market opportunity, and we are scaling production capacity to support our long-term growth plan.

To conclude, I would like to thank all our employees for their hard work and their dedication.

I also want to thank our customers, partners and the shareholders for their continued support and confidence in ACM Research.

I will now turn the call over to Mark, who will discuss financial results in more detail.

Thank you, David, and good day, everyone.

We had strong financial results in the second quarter.

Unless I note otherwise, I will refer to non-GAAP financial measures, which exclude stock-based compensation and a new line item change in fair value of financial liability, which I'll describe shortly.

Reconciliation of these non-GAAP measures to comparable GAAP measures is included in our earnings release.

Turn to page -- Slide 9. For the second quarter, revenue was $39 million, up 35%.

Growth was driven by solid demand for our front-end equipment and back-end tools.

As David noted, we had a balanced revenue contribution from our 3D NAND customer and our 2 logic customers.

Total shipments were $45 million versus $33 million in the year ago quarter and $12 million last quarter.

This includes deliveries for which revenue was recognized in the quarter as well as deliveries of systems awaiting customer acceptance for potential revenue in future quarters.

Gross margin was 49.7% versus 45.4% in the prior year period.

Gross margin was above our long-term target of 40% to 45%.

Gross margin varies on a quarterly basis due to a variety of factors, such as sales volume and product mix.

Operating expenses were $11.2 million, up 42%.

The increase in operating expenses was related to higher R&D on new products and increased sales-related activities, including additional activities in the U.S. market.

Operating income was $8.2 million versus $5.3 million in the year ago period.

Operating margin was 21% versus 18.2% in the prior year period.

And now I want to provide some detail below the operating line.

Our GAAP results included a loss of $5.4 million described as a change in fair value of financial liability.

I want to be clear, this was a nonoperating, noncash accounting entry that is excluded from our non-GAAP results.

It resulted from an agreement that was required for the STAR Market IPO.

Let me provide some more context around this item.

In 2016, before the U.S. IPO, ACM issued a warrant to a private equity investor called SMC.

After ACM's U.S. IPO in 2018, SMC exercised the warrant and received Class A common stock.

In order to comply with the STAR Market IPO, PRC regulations required SMC to surrender those shares first then get PRC approval, after which ACM would deliver the shares back to SMC.

For this reason, on April 30, ACM entered an agreement which canceled these shares and provided SMC with a number of alternatives, including a warrant for the same number of shares.

This obligation is treated as a liability on ACM's books until a specific alternative is selected.

ACM's stock moved up $22.43 from April 30 to quarter end, which caused a $5.4 million nonoperating, noncash book loss in our Q2 GAAP results as it was mark-to-market.

This liability was terminated on July 28 when SMC selected the warrant alternative and entered an agreement in which ACM issued a warrant.

The history of the SMC investment has been disclosed in detail in 10-Q, 10-K and 8-K filings since ACM's IPO.

We encourage you to review these disclosures for more details on the matter.

In summary, we view this as a good outcome that represents forward progress towards the STAR Market IPO.

Moving on.

Net interest income was $0.1 million versus a net expense of $0.2 million in the year ago period.

The difference was due primarily to increased interest income earned on a larger cash and restricted cash balance.

Net income attributable to ACM Research was $6.2 million versus $4.9 million last year.

Net income per diluted share was $0.29 compared to $0.26 in the same period last year.

Now I'll review the balance sheet items at the end of the second quarter.

Cash and equivalents were $86.4 million at quarter end, up from $52.3 million at the end of Q1.

Quarter-on-quarter increase was due primarily to the release of restricted cash from the PE investments, which were previously held in reserve pending submission of the STAR Market IPO application.

This was partly offset by the investments David mentioned in the Lingang facility and participation in the SMIC IPO and net cash used in operating activities.

Short-term borrowings were $25.8 million, up from $3.9 million at the end of Q1.

Total inventory was $49.7 million, up from $45 million at the end of last quarter.

Of the total, finished goods inventory increased to $17 million from $11.6 million at the end of last quarter.

The $5.4 million quarter-on-quarter change represents a net increase of first tools that have been shipped to customers for evaluation.

Note that finished goods inventory is carried on ACM's balance sheet at cost, pending customer acceptance and revenue recognition.

To conclude, we are participating in the growth of major new IC fabs.

We are ramping production, and we continue to develop and deliver innovative products.

We are optimistic about our opportunities in China and expansion outside of China, and we remain committed to achieving our mission to become a major player in the semiconductor equipment market.

Let's now open the call for any questions that you may have.

Operator, please go ahead.

(Operator Instructions) And our first question comes from the line of Quinn Bolton from Needham & Company.

Hey guys congratulation on the nice results and the higher outlook for 2020.

Maybe just wanted to start with the announcement yesterday of the $36 million of orders.

Can you give us a little bit more detail on timing and delivery of those tools?

And it sounds like it's for a pretty full suite of your white cleaning products.

Okay.

Thank you.

So actually, this is the 2 new customers we're penetration in the China market.

And as we indicated, both customer, major product is analog and also power devices, such as IGBT.

I think they're -- we've got a very good traction from them.

And their -- both company order multiple products and a total of $36 million.

We're still negotiating more of their PO and their progress also.

So it's a very good market in China.

As I mentioned, this is a fast growing and analog and for 5G and also electrical vehicle IGBT devices.

And also, we can see a digital customer maybe come out to play in this field.

So our semi-critical process tool and which auto bench and backside cleaning and also the scrubber and some SAPS tool as really they like very much.

And also including customer interest in our copper plating tool.

So as the product is going on, I can see our vertical furnace would also attract their attention, and they will also target now future vertical furnace application, either [BSBD] or high temperature [Neo] in their future application.

And David, just to confirm, this is more than just bids going out, that these are confirmed orders that you have now received from those customers?

Actually, $33 million is a portion of its deal, portion in the quarter final bidding process.

The typical Chinese customer and some customer, they have to go through the formal bidding process.

However, before the bidding, they're going to mostly select the technology, specking and all their requirements they feel comfortable, then they can put in the bidding process.

Yes, both.

Okay.

Okay.

And then on Tahoe, congratulations on the second shipment of a production tool.

But I think you also mentioned delivering additional eval tools this -- later this year.

Just wondering, are those all within your existing Chinese customer base?

Or are those also starting to sample to a wider base of customers, potentially even outside of China?

Yes.

Okay.

I should say, this moment, we talk to their existing customer base.

And also, we see the interest also from new customer Phase II.

And so we see a couple of opportunities right now.

And hopefully, we can capture both.

Great.

And then just last question for me on the U.S. delivery of the SAPS tool to the OEM demo lab.

Can you talk to us about how that sort of helps the business?

Obviously, it sounds like you wouldn't sell additional tools to that OEM, but it sounds like perhaps more of a sort of a cross-selling or joint selling opportunity that is IDNs come into that demo lab, they see your SAPS tool and hopefully, to the extent that the U.S. OEM sells its process tools, you would gain SAPS orders as part of that equipment set.

Is that the right way to think about that arrangement?

Yes.

Let's give you the background.

Actually, this is OEM customer, obviously, with NDA, we're not allowed to disclose name.

And they have a special requirement and to do actually preclean and process or maybe also post cleaning process.

And they found our tool and running very well.

And from there, actually a common customer in Asia.

So the critical in the process, for their process working well is a real precleaning cleaning.

And that's why they identify our cleaning tool as a very critical element for enabling their better performance.

So that's the point of selecting our tool.

And from our point of view, obviously, we view this good partner, right they value our tool and also helping process.

And hopefully, this integration process and will make both benefit, right?

So that's we're looking for a lot of effort together.

Actual tool has been installation finished in this demo lab of their OEM customer.

And we're expecting our cleaning capability will enhance their performance, therefore, end of -- they get a better penetration for their next-generation device through in the customer side.

(Operator Instructions) And your next question comes from the line of Patrick Ho from Stifel Nicolaus.

Congrats on the nice quarter and outlook.

David, maybe first off, in terms of the ramp that you're seeing now.

Obviously, a little bit of it was built up from pent-up demand from the March quarter when restrictions were in place.

But we're getting indications that overall Chinese capital spending is increasing.

Do you believe some of this is maybe the Chinese industry pulling in, trying to get as many tools and ramp up capacity as soon as possible?

Or is the timing from your perspective within the range that you looked at for 2020 as a whole before COVID-19?

Well, that's a good question.

Actually, there a lot of existing customers, they only give us a prediction or projection even early beginning of this year, right?

So that's something I think our existing customers so far exactly follow their plan.

And also, as you say, executing the plan very well.

And not much impact by the COVID-19 after January timeline.

And also, we see additional new customer come up, like I say, 2 new customers we work -- we have PO and also bidding process.

And they're pretty also come to our attention or they become our new -- I should say, our new breaking through customer.

So they're also increasing they're building fab and they're going with the next end of this year, obviously, continue to invest next year.

So from this point view, I should say, the Chinese semiconductor equipment continue to grow.

And also, even we see the better next year grow from so far our information we get from customer side.

So next year is a better year than this year.

Great.

That's helpful.

And maybe as a follow-up question for you, Mark, in terms of the inventory levels.

You answered the question on the prepared remarks about the evaluation units on the inventory line.

But at the same time, as you're looking at a bigger ramp potentially in the second half of the year.

How are you managing core parts inventory, whether you're still seeing any supply chain disruptions?

Or is it more a "normalized operations" in terms of your parts and inventory procurement in terms of building systems?

Yes.

No, Patrick, thanks for the question.

So we -- our shipments are really looking pretty strong for the back half of the year.

We gave you our revenue outlook.

The 2 new customers, those will be shipments but probably not revenue this year.

So the factories are going to be pretty busy through year-end.

So on the supply chain, we've done a lot of work.

Again, as you know, a lot of our supply chain, we're fortunate is in Asia.

China is certainly back to business as we speak.

There are some components that we have to get in Japan or even some in the U.S. that we have seen some lead times stretch out.

But we're managing it closely, and we feel we've got that mitigated.

Nothing that's -- at this point, or really that we expect would interrupt our plans for the back half of the year.

And your next question comes from the line of Suji Desilva from ROTH Capital.

Congratulations on the progress here.

Very impressive.

So the 2 new China analog power customers, a new category, I guess, for you guys.

David or Mark, can you talk about the addressable opportunity in the analog power customers longer term versus the existing memory or foundry customer sets you have, just the size -- relative sizes.

And are there additional analog power customer opportunities either in China or globally that become open with this kind of breaking into these too?

Yes.

Okay.

Well, actually, the -- as I said, it's a new customer, and it's a real indication, and this is a big demand and also market demand in China.

We view this a very good opportunity, and we work with them actually from end of last year.

And actually, the point is really interesting.

We're not penetrating one tool by one tool.

They give us a batch of the order, right, at one time, because they're building their fab very rapidly.

And also our tool has been selected in phase 1. Obviously, when expanding phase 2 as a very good candidate for the (inaudible) tool.

So we're very happy with the -- so far, talking, working with the customer.

And also they like our technology and also they check all our reference.

They found a tool in other customer site and working very well.

And as we have given the confidence to give us a batch of order.

And it's a very good indication.

Plus, as I mentioned, there will be leading to other product we are on the development right now.

So that's really open big window for us to penetrate into the power device and analog market.

Yes.

Suji, yes, just one thing I'd add.

In David's prepared remarks, we talked about the TAM.

And so we always have been talking about our core cleaning products.

And before we used to talk about SAPS, TEBO, Tahoe addressed about 50% of the $3 billion cleaning TAM.

With the new semi-critical tools, we've taken that to 80%.

So I'd say we look at it by a product basis across all the different segments.

So that's where it's captured in our TAM calculation.

Okay.

That's very helpful.

And then also on this U.S. partnership you've announced, how does this partnership progress from here?

What are the next milestones and timeframes for kind of for an opportunity from there now that you're in that lab?

Well, actually, this is the OEM demo lab, they're probably going buy one, right, and our tool.

And our goal is really working closely with this partner, and they can benefit our clean technology, and therefore, they can demonstrate a better performance in the customer site.

And then meanwhile, this is, I call it post and [training] cleaning as that's definitely open potential window for us, right, getting to the customer, hopefully, in global in the U.S. So we view this as a very good collaboration, good effort together because we found that cleaning becomes more and more important in their process, right, a variety of process important.

So we see that our technology has found a real niche, another very important process step.

You have to clean the real small particles and reach the almost particle free performance.

And that's really our SAPS and potential TEBO will play, including our Tahoe brand become -- they also not just their I call performance.

And also, we have a very heavy cost saving for their asset.

So that's really -- we see more and more demand for our technology and also we are confidence and almost each -- almost every customer needed technology, get into their production, the improving yield and see the chemistry.

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

Congrats on a great quarter.

I just have one quick follow-up question with SMIC.

What is your -- given the products that you're working with as a valued supplier with them, can you kind of quantify what your potential revenue opportunity would be in the new 100,000 wafer start per month fab?

Yes.

Well, actually, SMIC as they are basically 2 major effort, right, expanding their fabric capacity.

And this year, they're already expanding their 28 nano manufacturing nodes and above in the Beijing fab.

And the one I mentioned this is a new 100,000 wafer with investment about a total $7 billion more investment, that's a new capacity they talk about.

So we are very in a good position.

And in terms of this fab 28 nanotechnology and because they use a lot of our I call them core technology SAPS, TEBO also Tahoe.

And also more important they use a lot of semicritical process, order bench, backside cleaning and also scrub tube.

So that's really become a very -- a promise revenue growth driver.

And plus, they also have the expanding 40 nano fab in Shanghai, too.

And that's also their new technology.

They need more of a processing wafer site, which, again, our SAPS, TEBO and Tahoe become important.

And also, we have our cleaning tools in from an ECP map.

And we believe that both tool will be very important and attractive for them and to -- for their fab expansion tool.

Further than that, also, we try to also work on the vertical furnace.

We already have one tool has been passing, debugging in another foundry in China.

All those process be qualifying, and we also see the opportunity of vertical furnace also can be getting to their, as I mentioned, expansion plan.

Fabulous.

Can you just give us a little bit more clarity, you guys kind of hinted that obviously, in your prepared comments that you would expect them to be a top 3 customer in the near future.

Can you give us an idea of if the shipments for new activity begin to be recognized in size sometime in the second half of this year?

Or is that more of a '21 event?

Yes.

Probably, I should say, again, the SMIC has been ordered quite a bit, right?

And even their existing 20 nano above expansion in Beijing.

So probably this year, they already get in the top 3, I should say, right?

Well, end up the real final announcement at the end of the year.

And obviously, next year, they're getting to the top 3. So we see there is the moment in 1TC and Huahong, Huali Group.

And SMIC will be the top 3 major player.

I mean your customer [top 3].

And beyond that, also I see other continually, I call it, probably muted recover in DRAM, and that will be -- add value and [better] portion of the revenue from Hynix and also other new customers in China.

Yes.

Christian, one other thing.

So for SMIC, I think one of the ways to think about it.

They've been a customer for a while, right?

But we've been fairly underrepresented there.

But there are some tools that we ship before they've been accepted, that will be taken as revenue.

But then there are some other tools that will be first tools this year and the timing of the revenue on those this year and next year.

(Operator Instructions) And your next question comes from the line of Mr. Charlie Chan from Morgan Stanley.

David, Mark.

Also congratulations for your great resource and adding those new customers.

So my first question is really about your progress in other overseas customers, including the top foundry customer and also another U.S. IDN.

Can you give us some updates for those customer win?

Yes.

Actually, we're working very close for the top 2 tier, and you mentioned about one major in Taiwan and other one in the U.S., they also have the memory fab in China, too.

So I think this year, we're still working closely, and hopefully, we'll break one.

And it very well can break 2, but this moment or go is probably at least break one of their penetration one customer.

The reason for that is we found our SAPS, TEBO and Tahoe.

All 3 products become attractive for them.

And also the cleaning become more important right now.

So the technology benefits, technology security, and that's their point of interest.

So we're working on that.

And when the time and reach there, we're going to make as much we can to announce that.

So this moment still working on that right now.

Sure, sure.

Understood.

So I guess the next question is to CFO.

So I'm very impressed by your gross margin second quarter, 49%.

So what's the right way to think about your long-term gross margin trend by considering the product mix, higher revenue scale, also the new factory ramp, you said that 49% was sustainable or even see some upside in the long term?

And also just a very, very small question about your onetime financial liability loss.

Because the press release suggested that, that terminated in July.

So does that mean that you are going to reverse that loss to a gain in third quarter?

Yes.

Thanks, Charlie.

So you managed to get a lot of good questions in your 2 limits, but it's impressive.

So yes, in terms of the gross margin, look, we're pleased with the gross margin this quarter.

As we kind of say, it has to do with product mix and scale as well.

We encourage the street to manage and the expectation should be 40% to 45% on that gross margin level.

We don't want to get too excited.

We have a big quarter because of 1 or 2 tools could really move it.

And we certainly wouldn't be disappointed if we had it kind of in the -- more towards the mid-range of our outlook.

So longer term, as we move to scale, we could reconsider that 40% to 45%.

But I think at this point in time, for your modeling horizon, we'd prefer if you maintain that 40% to 45% outlook.

Yes, let me take a second on this noncash nonoperating charge.

It really is a technical accounting issue with no impact to non-GAAP.

I'll give you some detail.

At the start of the second quarter, SMC held 242,000 shares of stock.

And really to comply with the STAR Market IPO, they surrendered the stock on April 30.

There was some optionality in the agreement, and so the obligation to return the stock is carried as a liability in our books.

So from April 30 to quarter end, stock moved about $22.

And that stock move had to be mark-to-market, which is what drove the accounting loss.

So that accounting loss is going to carry into our Q3 result, not in Q4.

And the reason it's carried into Q3 is we actually didn't terminate the agreement until July 28.

And then we issued the warrant to SMC.

So at that point, the 242,000 shares of SMC stock, they were part of the warrant.

They go into our share count calculation with no mark-to-market requirement.

And the other side of it, it will -- the loss will never see -- the book loss isn't going to come back through our income statement, but it will be seen in our paid-in capital that removes the liability.

So like we said on the call, this is a good outcome forward progress towards the STAR Market IPO.

(Operator Instructions) All right.

Seeing no more question in the queue, let me turn the call back...

Wait, wait.

Operator, we see 2 more questions.

Mark Miller?

Yes.

Next is Mark Miller from...

Congrats on your new customers and your momentum here.

Just wanted to ask the -- you guys -- you were developing new tools.

The R&D costs went up by almost 50% in the June quarter.

Where do you see R&D trending for the rest of the year?

Yes, you bet.

So Mark, we -- yes, that's a good question.

And I think we always started the year, we have a discipline internally to balance our near-term profitability with investments in the longer-term opportunities.

And so when we saw our revenue moving -- got confidence, and we saw some additional upside to take our range up.

We started investing in some additional new products.

So R&D for the year, we see it kind of staying at about that level, about the $5 million or so per quarter.

If we see some additional revenue, we might increase that to bring some new products to market faster.

Okay.

And just in terms of your new plant.

As you load that plant, would you expect that to have a benefit on your margins as factory loading goes up in the second facility?

The second facility.

Yes.

Maybe a comment, and Mark is the new facility is obviously --

He's talking about the (inaudible) -- he's asking about the (inaudible) factor, I think.

Right, Mark.?

(inaudible) talk about the Lingang new facility.

Yes.

I'm talking about just generally factory loading with the new facility coming up, is that going to help you with margins?

Yes, okay.

Good.

And we have bought purchased land and right for 50 years.

And with the new factory, we introduced more of our sophistical manufacture system, also a lot of automation going on with that in the process and definitely will lower our manufacturing costs.

And also more important, will be more of a precisely machine under assembly line and also inventory control.

So with that system implemented, we probably can control our inventory and also precisely management working in progress schedule.

That we think was the lower manufacturing costs.

Yes, Mark, I think one of the earlier questions asked about our longer-term gross margins.

So yes, I mean, we would think that, hopefully, we'd be in a position to reevaluate our margin range on that front.

But really, Mark, when we think about this new facility, it's -- there's a lot of things you need to do to be able to track some larger customers, right?

It's not just a great product.

It's not just a balance sheet.

It's not just a strong services organization.

It's really about the production capacity.

And so we think this will help to our efforts with bigger customers.

Yes.

Actually, we (inaudible) facility before.

With this, we calculate between either we continue renting a new facility versus we building our own.

In the long run, we talked about probably more than 50% to 65% saving in terms of rental outside.

More importantly, we can have a building on long term and strong R&D facility, which normally, we cannot spend money on rental -- rental area, right?

And the 5 years have a go at a different place.

So that really make us a decision to get this land and build a long-term R&D facility that will also increase our R&D capability and also much better control and also put more effort in building on the lab.

So that's another benefit with this new land purchasing and also the facility build-out.

And your last question comes from the line of Krish Sankar from Cowen & Company.

And David and Mark, congrats on the really strong results.

I had a couple of them.

David, when you look at the single-wafer clean product, now that you're shipping into a wide range of customers, how would you characterize the single base of clean intensity between logic, foundry, memory and also now analog and IGBT customers, who's the most single effort in terms of and who's the least?

Yes.

Okay.

I think that -- you look at last year, our logic versus memory, and we're almost at half and half, right?

And so that's pretty much equally divided.

Even looking this year, I should say, we still have roughly probably close to that half and half, maybe heavy on the memory a little bit.

So we see that both opportunity is important, either logic or fab and also this, I call the logic or foundry versus memory, right?

So you know that we have 2. This moment we have 3 memory hubs buying our tool right now.

One is obviously our older SK Hynix and YMTC.

Also, we have a tool and almost qualify in the [6 MP and hub 8].

So that's our third customer and on the memory side, and we'll continue exploring other new memory and facility another customer, too.

So beyond that in their foundry wise, as I said, we are normal logical devices, now we're getting analog and also the power device, too.

So that's another market, and we see it grow.

And we have a capture 2 customer.

And we probably will capture another power device customer, hopefully, beginning next year with another increase for market expansion.

All right.

Got it.

And then for Mark, a 2-part question.

Thanks for the color on the gross margin, how should we think about op margin, would it scale with revenues?

Or would there be ebb and flows to it since the new product introduction in eval tools can impact op margin?

Yes.

I think it's a good question.

So yes, on the operating margins, I mean, we really talk a lot about balancing near-term profitability versus, really, we think it's a really important time to expand our product line right now because of the customer activity that we're seeing.

So we'd expect to spend in this opportunity.

You saw an uptick in our R&D and our spend in Q2.

I think mid-teens operating margin is the right way to think about us.

We'll continue to spend into that and hopefully see some leverage on that as we move into next year.

But yes, I think that's -- it's the right thing to do at this point in time.

So yes, that's -- I don't think I -- yes.

I don't know David if you had anything to add to that.

Actually, I want to say that at this moment, we really try to balance between our spending versus profitability, right?

So we think working to heavily invest in R&D and also in the customer -- other sales and marketing activity.

But at the same time, we keep a certain profitability in our line.

So I think so far, we did very well, and we'll continue to do that, the balance between the 2 factors.

And in other words, we have also continued to invest heavily.

We're also working on a new product, and hopefully, we can announce next year.

So that's our effort and put together.

And again, try to grow our market opportunity and also we try to catch more customers in China, also outside China.

Yes.

Krish, one thing I did forget to mention.

As our shipments, some of the shipments you won't see showing up in our revenue and so that's going to drive a pretty heavy OpEx.

So you'll get sales commissions and what have you driving our costs on the revenue, plus on the demo tools as well, that won't show up in our revenue.

Got it.

Got it.

That makes sense.

And just a final question from my end.

With the new Lingang facility, what is the revenue capacity for the company right now?

Good question.

Actually, by our plan, we're building almost about 1 million square feet of their facility, right?

And in that, actually about 40,000 square feet will be for their 2 identical fab.

So with other, we're working on right now, we think about at least 5x more than today is our capacity.

So probably about $1.5 billion revenue is probably the capacity we're working right now.

And with more automation, more of a spacing of their -- efficiently using, and that's our goal, 5x of today.

So $1.5 billion.

That's our revenue target.

Seeing no more question in the queue.

Let me turn the call back to David Wang for the closing remarks.

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 some upcoming Investor Relations events.

Gary, please.

Thanks, David.

We have a number of events coming up over the next few weeks.

All of these are virtual at this point, of course, and they're all invitation only.

So if you want to meet with us or attend the presentation, please contact respective sales representative.

On August 13, we'll participate in the Needham Virtual Semi Cap and EDA conference.

On August 27, we'll attend the Nomura Virtual China Investor Forum.

Also, we'll participate in the Jefferies 2020 Virtual Semiconductor IT Hardware and Communications Summit on September 1. And on September 9, we'll attend Citigroup's 2020 Global Technology Virtual Conference.

Finally, on September 11, we'll participate at the Crédit Suisse Asia Technology Virtual Conference.

This concludes the call.

Thank you for attending.

You may all now disconnect.

That does conclude conference for today.

Thank you for participating.

You may all now disconnect.