Q3 2022 ACM Research Inc Earnings Call
[music].
Good day, ladies and gentlemen, thank you for standing by and welcome to the ACM Research third quarter 2022 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.
Now I will turn the call over to Mr. Gary <unk>.
Wojciech managing director of the Blue shirt group Mr. Wojciech. 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 open today. The release is available on our website as well as for news wire services. There's also a supplemental slide deck posted to the investor portion of our website that will reference during our prepared.
Remarks on the call with me today are our CEO , Dr. David Wang our CFO , Mark Mckechnie, and Lisa Pond as CFO over our operating subsidiary ACM Shanghai before we continue please turn to slide two let me remind you that the 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 <unk>.
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 then unrealized gain or loss in trading securities for our GAAP results and reconciliations beta.
GAAP and non-GAAP amounts you should refer to our earnings release, which is posted on the IR section of our website and the slide 12 in the supplemental deck with that let me now turn the call over to David Wang who will begin with slide three David.
Thanks, Gary Good afternoon, everyone and welcome to <unk> third quarter 2017 to earning conference call.
I always thought of with the new China trade there.
<unk> issued by the U S Department of Commerce Bureau of industry and security in October the updated export controls power equipment and parts subject to U S export controls, including items from U S and <unk>.
And to the activity in the U S persons.
Based on our preliminary assessment, the new policy the strict export U S parts for tour deliver to advanced node facility offered tools that meet a certain E. C. C. N parameters some of our shipment will be impact our chalk currently have 5% to 10%.
Other components sourced from U S and we produce.
Some tour in certain.
Categories.
Let me provide more detail first.
Some of our customer at the mountain no other facilities shipment of this facility maybe impact due to U S export restriction.
No other facility defined as Vod, where production and there is strictly the technology level occurs our policy does not apply to other customer beauty with the mature nodes.
Even when they are on the same campus second.
ACM Shanghai products, neither the primary of a certain extra control classification member or you see a number.
On the Commerce controlled list shipment of this tool may also be impact if those two are neither party front U S is the main courtyard ECB towards a specific lease support Cobo Matto play D SIB.
We're farthest product and one of the new platform product that we plan to introduce.
It does not include our Canadian dwarfs, most of our E. C. B. It was our tablet aggregators or other new platform products, we plan to introduce.
Third the policy restrict U S purchases from city to city Shim.
Shimon and the servicing products involved with advanced nodes or at least the new.
This is a number we have no U S employee in our Shanghai in Korea R&D teams. Therefore, the impact from the from the New U S person.
Obviously in the minimal we have however implemented compliance protocols concerning U S person involvement in facilitation shipment and a services supporting activities.
We believe the new policy will not impact shipment of ACM Shanghai tool that do not have a USA pods or do not include restricted activity appears persons.
And we believe that ACM Shanghai to draw that are not in the with the ECC and category can be shipped to the mature nodes, even with U S Pas and a U S person environment.
I will now move on third quarter highlights.
Please turn to slide three.
Our third quarter results were record for the company revenue was $34 million of nearly 100% driven by our flagship Canadian choice and a strong growth from our new east AP and furnace product, which table.
Shimon where were $163 million compared with 99 million last year.
Gross margin was 43 point 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 nine months of truth, Anthony to revenue grow 70% Canadian to a growth of 56% U S. A pea in the furnace took all 316%.
And it contributed to a 20% themselves.
We had 310% customer, which together accounted for over 50% ourselves.
Versus 66% mix for the same period last year.
We made good progress with our English ATM and a major semiconductor manufacturer outside mainland China.
The evaluation of the two Canadian tool and a U S factory of their large U S based manufacturer, it's going well and we are gaining traction with potential new customers in Europe and other reviews.
In Q3, we launched our first <unk> product.
D. The wound with a fast growing application for manufacturing advanced nodes in memory and logic, making their critical new capability for furniture portfolio.
We delivered our evaluation tool to a top tier China based foundry manufacturer and poverty.
And tired of qualification in 2023.
This is a first in a series of a furnace detours with a product line.
Sanction I've had.
We expect our first <unk> product to making good contribution starting next year with <unk> technology expect to represent about half of that total funds market.
Florida's Air D office, taking even at higher throughput than traditional single wafer LD draws and present a compelling value proposition.
We believe that Acm's L D. A furnace with a proprietary technology can narrow the performance gap between furnace EOD.
And their single wafer EOD.
Next we plan to grow our operation with investment in new facilities.
Construction of our zinc production and R&D Center is in full gear and it remains on track for initial production in the middle of 2023.
I also want to announce we are close to purchasing a new at a quarter in zhenjiang Shanghai.
We're sitting a value of China.
We're committed to their China market and as the new headquarter will provide us stability.
Employee 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 two new product category planned for later this year.
Now I want to provide more thoughts on the impact to our future business for a new U S restrictions.
We expect a temporary policy and some customer as the industry adjusts to the new policy.
Shanghai is committed to comply with new regulation and meeting the demands 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 quickly recover most of our business has been for 28 nano and Bob logic devices, 96 layer or less three D NAND and 19 nano and above DRAM.
Looking forward, we expect that our China customer to continue 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.
We are strongly positioned to participate in this opportunity.
For the mountain note, we remain committed to participating in that market you for compliance with the new U S export control.
See I mean, the focusing more effort to bring its advanced technology for leading edge fabs of global customer.
We are making good progress with the U S and the European customer and expanding our global sell and support teams.
We're 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 support and grow worldwide customers.
I will now provide our outlook please turn to slide six.
As a result of new U S trade policy and supply chain constraints, we have a load or the upper end of our full year revenue outlook.
We are now expected to Fannie and Freddie on revenue in a range of $365 million to $385 million versus the previous range of $3 65, and four 5 million.
The range of the company's 2022 outlook reflects among other things the impacts from the new U S trade policy supply chain constraint.
<unk> spending.
Scenario for the pilot production ramping up key customer and the timing of acceptance of first tool under 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 , Marc who what reveal details of our third quarter results Mark.
Sure.
Thank you David and good day, everyone and please turn to slide five unless I note, otherwise I will refer to non-GAAP financial measures, which exclude 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 will 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.
For single wafer cleaning tools, which includes SaaS tebow 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.
For advanced packaging, excluding ECP.
<unk> 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, primarily due to a higher mix of ECP frankly I'm in packaging.
And other technologies and a positive impact due to a change in the remnant.
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 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 topline operating margin was 25, 1% compared to 19, 5% unrealized loss on trading securities was five.
$3 million the loss reflects the change in market value in the shares of SMIC, which are owned by ACM Shanghai.
It's mark 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 $6 $4 million due to gains recognized from the impact of exchange rates on foreign currency denominated working capital transactions versus $3 million in the year ago period.
Income tax expense was $10 5 million compared to a benefit of <unk> 3 million in the year ago period. The effective tax rate for 2022 has increased primarily through a new requirement to capitalize and amortize previously deductible research and experimental expenses under IRS code 174.
<unk>, which became effective on January one 2022, the company's tax provision for the nine months ended September 32022 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 <unk> 42, compared to net income per diluted share of <unk> 19 in Q3 of 2000 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 it.
The last quarter.
Finished goods inventory of $109 2 million working processes.
$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 Lincoln and other facilities for the full year, we plan to spend 30% to $35 million in total capex for <unk> and other facilities there maybe.
Additional capex in the fourth quarter should be closed on our new headquarters and John John .
That concludes our prepared remarks now lets open the call for any questions that you may have operator. Please go ahead.
Thank you if you would like to ask a question. Please press star one.
One moment, while we compile the Q&A roster.
At this time the first question will be coming from Quinn Bolton of.
Needham <unk> company your line is open.
Thank you David and Mark Congratulations on the strong near term shipments, obviously big Big questions I think for a lot of us on the line or the impact to the export controls and it looks like it's certainly having an impact on the fourth quarter as you take the midpoint.
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 what your what the impact of the new export controls might be on 2023.
Is that $50 million is it $100 million of potential business that could be affected 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 128 layer NAND versus how much of your.
How much of the impact is to do.
Parts that contain or sorry tools continues parts and or the new.
Tools that are affected by that.
And classifications, sorry for the long questions, but hopefully you get sort of what I'm driving at.
Okay, well, let me cover first one and maybe they are in their market and outright.
I mean, our revenue projection for the next year forecast normally give a general timeline.
A moment I think it's still too early probably can't give you too much detail his moment.
I want to mention there.
Now looking at is the restriction.
Actually I have to say that definitely some.
Some advanced nodes.
Production plan, we're probably going to slow down however, as I mentioned in the script.
Your child has a lot of them mature nodes and chip and our consumption.
In a market China is import almost 60% of global of their chips.
So for those mature nodes I think would be.
Potential and also a lot of her.
Let's see electrical car and also a lot of commercial product using the opinion of mono and the 45 model. So.
So we see that it will be still continue to grow even.
Possibly speed up in this area.
In Asia of their fab Buildout.
So also our technology most through this moment, where service for those nodes be truly and where we're positioned.
Market. So therefore, I would see that the mature nodes or continue to grow and even speed up and that Devon has some demands and they'll get a slowdown so combination put together I still say ACM is doing in growing growing pace.
<unk>.
In the China market right, that's I view there.
For the market we're talking here.
Then at the same time.
We have to also increase.
Our two new product online.
That's probably in Judaism, there soon and by end of this year there was a new product at all.
Ida portfolio.
Or some other party in the market. That's why we gave us the more over.
I called revenue stream, probably in 2000 and for and for Antonio product and also reason announced this <unk>.
Of.
Of course, they're furthest product and as always we'll keep you going to give us revenue in 2300, <unk>. So we're still keeping our confidence and the word what do you have in the market in China. We have a very you know I call there.
And our full R&D engineer and also together with the Korea engineer.
And also very preparation for their view this.
Our mature nodes participation in particular the growth.
Meanwhile, also we have tried to expanding our <unk> and <unk>.
In the international market, Alright, especially when we have a building our Korean fab and Korean R&D facility. So for that reason I will say.
We're still can casino R&D and for their service global customer and we want to steal our differentiator product and the servicing for the entire.
Industry.
Well I'll give you the first question I mean.
Mark you want to cover a second question or you want anything to add on that.
Yes, I can.
Thanks, David.
Yes, I think <unk> second question was about what percent.
Our tools, we're going to advanced nodes.
I might.
I mean, it's hard to measure, but it's a pretty small percentage right and so the majority of our business has been.
The more mature nodes.
But.
As everyone knows.
<unk> is in a good position, where we've got some flexibility where we can ship a lot of <unk>.
Were others class.
But.
Well, 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 from other players.
They're spending we would expect it.
To pause for a bit as David mentioned in the in the prepared remarks so.
I guess kind of bringing it all together.
Looking out to 2023 as David noted.
We're not we won't give the guidance like we always do it at the beginning of the year, but but we're planning for some growth.
And we would expect there to be a bit of a pause in the first half.
As the industry adjusts and works to get their licenses.
As the customers work on for instance, Fabs that building that don't have.
The.
The mature nodes right. So they can have almost what you would call it compliant fab.
So we're watching that closely but we would anticipate kind of a pause from some of the bigger customers.
Some of it hit in this quarter and some of its carrying through into the first half of the year, but as David noted, we didn't we'd expect the spending and the industry to start being able to support the mature nodes at those customers as you move through the year next year.
Great and then just maybe.
Okay.
Our U S. Their parts right ratio.
And we are a product normally you have a 510% U S.
Components right. So clearly we're not in a wherever actually our Canadian product is not at ECC and category. So far our major in our revenue and we still can't using U S pods and those he was firstly evolve to stay out of the path to either.
Mature nodes customer right.
For those properties are.
Our Chinese engineer or our Chinese staff there their activity to building tool for the advanced nodes.
And then there will have to this moment cannot get any pause on the U S. So they are probably have the chosen into other combines the supplier.
Any other area and we do have found some some pause in China in China locally.
Yeah, and if something would take time and but there as I said.
And this can be taking.
Probably a year, maybe a year or two and however, it really depends on how there.
Vendor and also it is a commodity supplier.
Fast quickly our reaction to this.
Changing.
I should say I still consider the U S.
Impact.
And then.
It's kind of a compare on the guy that were pretty modest mineralized.
Although it will come back.
And one final quick clarification, Mark and David for the parts that are under the ECC and classifications those are the.
The tool.
Tools, where you cannot source U S components is that rates are would only be for instance, the cobalt ECP tool not the rest of the.
ECP line and then I think you mentioned one of the two new platforms May also fall under <unk> and I am just trying to get a sense, what what what shipments for HCM or are affected and where you are free of restrictions.
Yeah actually lucky as they're known as the cover putting cobalt right really.
Really are targeting probably to seven nano right. This moment.
So not expecting higher revenue in China, obviously, so a lot of 80.
<unk> 20th anomaly, Bob those notes is all cobbled Brady even their 60 nano 40 nano.
In fact, there's still cover plate in other words, so I should say are calibrating steel, okay, and now that <unk>.
And nothing there are.
Our new product, we can introduce designate <unk> yet right. So.
In this case, we'll have the Vod as saw their other U S parts out and as I said again, given the new our new product, we're talking about you CCM U S pawn probably.
I would say, probably a 10% range right on the back of that so it still can be.
Possibly found the other alternative choice and obviously, either quantify and needed to be and working with the vendor and together. Since then so the qualified rate will take time and however.
We think can be solved.
Understood. Thank you David Thank you Mark Thanks Quinn.
Thanks, Greg.
Thank you.
If you have a question. Please press one one on your telephone.
One moment, while we prepare for the next question.
Our next question will be coming from Susie to Slava.
Roth Capital your line is open.
Hi, David Hi, Mark Congrats on executing on a obviously a very tough environment here can.
Can you guys talk about the Korea footprint for <unk>.
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 has a plan to be similar to Shanghai or is it leaning more towards that leading edge nodes.
Okay. Good.
You know, the Korean and which not a Korean.
Our subsidiary 2017 rate and since the highest or couldn't hire people and today, we're about almost 110 employee in Korea and in.
Which 60% on R&D.
So can we now have over 3000 square meters.
<unk> actually we can manufacture where the Canadian tool.
Future probably can also manufacture in a couple of ratings will and whistle. We have are a dryer.
Let's see the furnace <unk> tool and most of the most fortunate also mailing their.
Korea and at some point you made in China.
As time goes on we do however, our two new introduced product and whatnot, but given name yet.
And there are two new product also can be manufactured.
Korea.
So I think Korean R&D manufactured base Oh by the way also salt also finding the one land.
In the final phase.
So the government probie for license.
That would it be Odeon was another secondary Metro Center in Korea, right. So what is the preparation I think what we're positioned to have a Korean maker tool of course kind of sell back to China.
Also we are also propel and the tool maybe in Korea to be a sell to the Taiwan and also to add to the.
I call it U S or European market right.
So at this moment I think whatever two manufacturing vendor why is the China.
Korea, and also where do Moreover.
More effort and to work with a Korean pop player.
Their customer here and also to do the R&D research and advanced node alright, So that's what would be the second.
Second the center and for Us expanding the global market.
Mark anything want to add on that.
No I think you hit it there.
I guess, maybe I'd mentioned, Matt and just having a second production center I think is pretty attractive to some of our international customers and so that all that will help us drive our international business.
Okay. Thanks, David Greg.
And my second question is around <unk>.
In the prepared remarks, you spoke about first tools taking longer for acceptance is that simply an offshoot of the.
The kind of reassessment with export controls or is there something else going on there right now more generally.
So I don't I don't think we said anything specific about first tools taken 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 it.
Delayed acceptances.
Okay, I may have misheard that alright, thanks, guys.
Thank you.
Thank you.
While we prepare for our final question.
Okay.
Our final question will come from coming from Crystal Schwab.
Craig. Please go ahead.
Hey, good afternoon, and good morning.
Mark can you just tell us where all the cash is.
And the use of funds and whether we can bring some of that back to United States.
Right.
Do a meaningful stock buyback program.
Can you just refresh us.
You showed a significant cash balance.
Yes, Hey, David maybe I'll use that.
Christian Hi, Christian Yes, yes.
Alright.
Maybe you can tell Wes catch right okay.
They are basically there.
The cash we have in most of the world.
Proceeds of.
Mark IPO last year, right and those money is belongs to a subsidiary.
We will have other temporary.
17, 5% of men minority investing there so we cannot directly with cash back to their major shareholder as the USA right.
So we cannot do that however.
I'm going on we have a profit January in China, and we do well.
Well, we can we can bring some dividend back to the U S and last year, we didn't do any of them, but we're still considering and this is one option and putting cash back to the U S.
Now lets me you know real buyback share really importantly, we're trying to.
House, our R&D and also a sales effort.
Exploring further U S and the European market and that study will consider.
Anything else you want to add on that.
Hi.
Christian So we break out our cash by.
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 in mainland China.
<unk> also had some some cash in Hong Kong, and South Korea, but as David noted.
In the U S cash.
We have we plan to use that to grow our business.
<unk>.
A couple of tools and a pretty major.
<unk> customer and so we've.
We've got a small services team in place, but that cash is good allow us to.
Run some pretty long term marketing and customer development programs and so.
We're not planning necessarily to do anything different with that cash.
Thanks Christian.
Great questions. Thanks, guys.
Thank you.
Thank you.
Incidents.
Please press star one on your telephone.
One moment, while I was there for another question.
Okay.
Our next question will be coming.
Robert.
Please go ahead.
Hi, There hi, Derek can you hear me.
Yes, Hi, Robert Okay, Great. Yeah. Thanks, Thanks for taking my question and congratulations on the good results I just wanted to get some clarification on the percentage of U S parts in your different types of equipment.
Are you able to clarify that.
For example, what percentage of U S parts or in your liquidity tools and other tools.
Yes, and typically I've said that we do 510% it depends on their Canadian to the pipe.
And we do have some either and so I'm kind of pump right and.
Those positive.
And upon the U S.
And so that's about a 510% in terms of annualized.
Okay got it and so.
Pardon me to get licenses or.
Is that my.
My understanding is that understanding correct.
Yes.
Actually the two category right that's equal.
Sure.
Now that you see at the end list, which is not.
Not easy yet right I mean, it's not as easy M and also west ship them mature nodes customer a facility and for those portion of their tool.
We do not need that finalizes.
So I'll need to you need a license is for the mountain nodes and also some arm tool within the ECC number which is echoed by seeking mobile copper cobalt Lady.
And also some <unk>.
Photos <unk> those tool if you're using the Pos Union devices.
Got it alright, so you are 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 the part is that correct, yes above up mature notes to make sure.
Alright, Okay. So you go into the market.
Hey, Robert Robert and David Let me just clarify so I mean, there's just there's a lot of regulatory and license requirements in general for tools go into China are going to other areas and so the.
The point is that this this new policy Hasnt added any additional restrictions for.
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.
And the tools that would be go into advanced nodes.
And for exports of products that would be going into this this new platform.
Is that a clear answer your question Robert.
Hello, Robert.
So I think we lost Robert.
Yes.
If you would like to ask a question. Please press star one on your telephone.
And we have another question coming from Robert Mckay.
Blue Lotus.
Hey, Matt.
Right.
Understood.
Can you guys hear me now.
Yes, I lost connection random public call I'm sure someone else took notes.
I'm, sorry, I didn't catch it but I'm sure someone will pick notes.
So I guess.
And my next question then would be what.
The U S headquarters is does that complicate things for you.
For your business because I understand the ACM research is headquartered in the U S of course, you have the Chinese subsidiary I was just wondering if there's any.
Any kind of negative impact from your from your specific kind of business.
Thank you.
Thanks.
The impact of U S Bank in China, I want to tell you.
Yes, sure. So let me just clarify it so just in terms of the Pis 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.
So just to make you subject to any extra kind of regulations.
In terms of the Pis rules due to your U S headquarters.
Okay, well, let's go to question and this is a moment of U S had a quarter basically.
Actually only conducting sells the marketing right and for their tool in the U S and in Europe , Alright, and so for those activity.
Promoting our tool are made in China, maybe in Korea.
And to the USA or to the European market.
I shouldn't say nothing impacting their rate ever.
Ever control law only vote per tool called the China, Alright, So I don't know the impact anything outside of China activity.
Right, Okay got it got it.
And then so the other question was about your.
Youre ECB tool so.
I understand it's only for the cobalt cobalt cleaning for DCT.
And so the other tools that you ship.
That our ACD than just like you were saying for wafer cleaning and Theres no.
License requirements for those mature tools that are not for example, under 28 nanometer that are not for Copel wafer.
Wafer clean sort of Copel <unk> et cetera.
That's correct yes.
Okay great.
Yes.
Correct.
Okay.
And then for furnace I think it also applies to furnace.
Does that mean, the <unk> spend going forward.
There would be no revenue stream per furnace, because I think from our remarks.
Got it and that gives that Devin your phone of HRD assay category, and which is easily see on category and.
For those Pas and for those two or probably we can either import any pause on the U S and second thing that we can either also have a U S person theoretically well right and our servicing resignation.
Human whatever altogether, so well you know that's the case, what devote all our responsibility and south marketing everything decision to our Chinese team and they have a CEO . There were sales of operation you know people there. So they take here right because they're going to sell but they will be using non USA Pos.
I guess first and kind of your model.
Got it Okay fair enough and then so for that corners tool than is there in China.
The Chinese suppliers that could.
That's the supply chain.
You need for that.
Domestically or would that be against the regulation is.
Good question actually the path can be using our welfare using maybe other on a country some possibly can see it from Europe .
In some parts from Korea, and some of them in Japan.
We can find some part already in China too right. So it's the beginning of the some kind of quantification qualify those parts.
Okay.
Yes, Okay got it.
Your view then do you have do you think that.
For the vast majority of your products you can prequalify width.
Non U S supply chain parts, and then theoretically maintained.
This lineup.
I should say, we're still evaluating that right now and we do have.
Some positives as a possible can be changed quickly.
Some part of that will have the real working with our supplier.
And then to quantify the pumps and also the Oregon customer to qualify the two.
Right so.
Big time now Theyre just one.
One day of switches right, but then remedy our qualification process.
Just say if we are changing the pods and six months to one year of typical pain you need the qualifying.
That's the typical timing are considered qualify new parts.
Okay got it okay.
Very helpful information.
Yes, congratulations on the good results and thanks for asking or answering all the questions I know it's.
To sort through all of these regulations. So thank you.
Thank you.
Thank you if you have a question. Please press star one on your telephone one moment. Please.
Yes.
Yeah.
Well remember we have our next question.
It's coming from.
Okay Alright.
Credit Suisse, one minute, while you lie.
To open.
Okay.
Do you hear me.
We can hear you.
Okay. Thank you Mark.
My first question is regarding I understand that from material tell the age.
In logic side, the market size market potential is for that in China.
Im also very curious how above.
I mean 96.
NAND 19 nanometer DRAM.
It's bad timing means that customers will continue to expand over the next few years I think one of the argument is that because.
These NAND and DRAM product, maybe because of the.
Cause Joshua issues the market is very worried that propel.
Potential China customers May now continue to have good expansion.
Next one to three years.
And obviously this is a moment whats still assessing their market rate is too early to give any conclusions right now.
If you say 90 nano DRAM above.
There's a lot of.
Each market in the DRAM business, not only getting into there.
Smaller smaller dimension and some DRAM steel sales hunting by mono, but a niche market there.
No.
Just kind of speak of a customer, but I don't see that in DRAM does have another application in the larger nodes right and for reading that I don't know really at this moment I kind of comment in the 96 layer as any other application we don't know yet.
Sorry, I cannot comment.
Sure.
Thank you Debbie.
A question for me is that so.
Sure.
Over the past few months the upturn.
The Shanghai finish kind of finishing the last thought I'll note.
Product development on the R&D side.
Do you see that kind of ahead of expectations in the past two quarters versus what's kind of I mean.
In terms of the new product development analogy is that.
Do you share a little bit more.
On the left our supercritical Jai to us great. Thank you.
Okay, well, new product and I think we are coming off or almost like a two or three year on effort right.
The two new product new category product, which is a rio double our addressable market.
It's a real good there.
Yes.
We're in the final stage and pasty and also do there.
Pretty much you want to make sure our testing okay.
The customer.
Acquirements ownership.
I still think we're probably possibly shipping by end of this year Antonio product for the customers.
And regarding the Cotwo dry clean product.
Think of where we're going also very well this is a.
Critical product and for other high spec ratio a training process.
And so our Chinese engineer is working very hard.
Trying to bring to market from the market.
Okay.
Thank you Debbie.
One more question is back to the gross margin side, because I missed the first few minutes Im not sure if you or Mark already discussed gross.
Gross margin E CPM softness versus corporate average because the second quarter gross margin. Its critical I'm just thinking about is there any potential up is there any possibility that.
Our gross margin will be more on the higher end.
Sure.
Turn range.
Thank you.
Well I still I would say that there are our gross margins in a range of 40 to 45 right and last quarter is again the combination rule.
You are right in our Cabo Radian for front end applications, and thus higher higher margin right now is allowing.
Laminates IV also we do have some combination of the Canadian.
I imagine right. So it's really depends on the ratio and there are also there we do have some lower margin products.
On top of LP tool right and also.
<unk> really dependent combination so I still say our module 40, 45%.
And so therefore, there for the near future.
Yes.
Okay got it. Thank you. Thank you David.
Thank you.
One moment, while we prepare for the next question.
If you like to ask a question. Please press star one one on your telephone.
Yes.
The next question will be coming from Charlie Chan.
Morgan Stanley Your line is open.
Thank you, Hey, David Hey, Mark Hey, Charlie first of all thanks for walking us through.
Yes.
It's a very challenging environment.
Thanks for Oded qualifications.
My first question you said about the.
Cyclical impact I know.
China is still need to be able to local 50, GNC I thought if you look at.
Outside of China, essentially Oh the <unk>.
G fast memory Fabs are cutting capex.
20% into next year.
That's going to impact your.
Plant in mature nodes.
And do you see any.
The mature and those customers are withdrawing from.
Cabot's plan recently, thank you.
Yeah actually Charlie I really Couldnt say, you know REO near future even though.
Next quarter to quarter kind of riopel above adjusted.
Like other high level point of view.
As I said, they're in China, or steel consumption, a lot of or mature nodes and products.
Yeah.
Also recent electrical car, even consider more of the power device.
A lot of or a mature node product, which is the steel now they're.
Enough or made in China.
And so is that a.
That point of view and China has been the real increase Moreover, mature node production and that means that their own requirement.
From that point of view I can see that in the next few year as steel out of our fab is doing this deal right to meet this requirement.
Because the U S. The market right now is in China.
Reason market here, so they can build their fab.
The other product so I found that point of view I still have a very positive reveal our China market via the mature nodes as a matter of what is the next one quarter two quarter or three quarters I Couldnt tell it and then I'll have the real private access more of the market next year.
From the long view I think there's a lot of a faster build up also electrical car driving.
Neil Hi.
Developed in China.
Power device can be another bigger potential market, we're looking right now.
Yes, I totally respect your.
Your view.
But just why we did this.
And then as before.
Capex.
Capex along to steal correlated with the.
Free cash flow.
So from what we're seeing right now.
There is some out of wafer pricing pressure.
The mature nodes so.
We worry about free cash flow.
Decline and.
At some point.
Catch up.
Capex plan, but anyway.
I do agree that the long term.
I'll say for China, as a mature nodes.
And my second question is about.
Your <unk> or your <unk>.
Titus departure for efforts too.
Many many months.
<unk> taken that dependency.
So you do you said that you wanted to clarify.
Non U S components on Japan, Germany.
China locally.
I think of that.
That that should be the way to do that.
My question here, you said that.
How how do you or customer company.
Production lines without the.
Critical to us by no matter.
ASML.
Lisa coffee tool.
Or applied much USA AP tool for.
Lam research ICP, essentially alright, meaning.
Hey, guys.
Companies or countries still.
<unk> will comply with the U S rule.
How do you.
Still fail, so you have to us.
Cost of a vehicle for those equity co.
Uh huh.
Products.
Okay, Let me clear that anything yeah, well, let me clarify that is that you have mentioned for the advanced node of a mature node.
Advanced nodes, because I'm not sure.
I think I think.
Should be fine right now made it from the.
Yes.
Export.
Perspective, or technology perspective that but much.
Advancing though is something that I am.
I am asking.
Yes, I think we duly anticipate their mature nodes or slow down right and a.
A lot of her.
Like you said the critical path and also creating a tool right is mainly in the U S. Right now and so those are system is really easy to find another.
<unk>, a replacement or either even in Japan or in Europe .
So that can be there so that yes, I agree with that so therefore, I would say that is really.
We're more focused on the mature nodes and as same time. We're also focused on the international market that would advance notes too right.
And like ACM have differential product, we're not only trying to sell the 6900 40 nano. We don't also south of the three nano sooner right. So.
We're gonna also folks there and they are in a market outside China.
Notes and this way, we can have a differential product and get there.
So they're a global market.
I would say this.
Very very reasonable.
Last question maybe.
Mark.
Debbie if you want to comment.
Because right now the.
Local you convinced that they are.
Uh huh.
More focus on the mature no opportunity do you stay more.
As competition from.
Your local peers.
And secondly, mark given the.
Kind of a reduced revenue to scale.
But I believe you guys continue to.
R&D.
Two lines to the <unk> line.
It would be the reasonable operating margin.
I'm shim for coming years. Thank you.
Okay and the mountains of first question I'll leave the second for their Mark Bossert.
Well and you mentioned maturing loans.
And real provision for them or not and then give you even continue right.
We're now can do mature nodes, continuing almost 90% about right also were launching a multiple of three years ago, although bench product right. So at this moment I think we're very well positioned for those mature nodes plus we do have a L. P. S ABB and those kind of or who will come out and cover.
<unk>, obviously, neither for mature nodes and also we do have two new products, which will also have a huge market either contribution or a mortgage market that possibility and potential for the mature nodes. So the in terms of a local competitor.
I'll answer this the way customers do with choosing.
And not only say low price and even looking at mature nodes. There's also two are difficult to make and also for the customers want to Randy advanced there for them as you know the production.
Have.
The part although the tool they can use the first right now to quantify.
Brenda after another so.
So I still think of this.
That is not easy you know and for any any tool player customer probably lag a one or two player maybe maximum three maybe two is good enough for them to choose.
Got it three or four different player and for the same product.
Clearly, if you're focusing there the R&D effort they make it than me.
Chip right. So so we're we're pretty comfortable opposition on technology and apps and also our customer relationship and also our commitment right also multiyear 10 plenty on the 10th of the year of issue with the customer So we're pretty okay with.
Compatible position in China.
Hey, Mark maybe the second question for you.
Yeah, you bet I think the question was about the operating margin kind of outlook.
As you know.
We've talked about this before but good luck.
We're a technology company.
We believe there is.
A lot of growth ahead of us we certainly.
It's still targeting that $1 billion revenue target.
Over the longer medium 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.
On the overall top line.
And so what we just did 25% here in Q3.
If you are depending on what kind of revenue you'd be looking at for next year, we'd like to have kind of a floor at 10% annual.
Level so.
With modest growth next year that would be kind of a.
A reasonable target.
And if any.
Good growth, where we hopefully will see some leverage.
Mark.
I'm not sure if.
I get it right. So we've had some moderate growth are you guys still comfortable you can get 10% operating margin.
Florida, both next year is that right I'd call that a target.
Yes, we'd call that a target.
It depends there is a lot of factors, we're going to invest in any given year, but we generally have kind of a 10% annual operating margin target.
Okay. Okay.
Fair enough. Thanks for all the answers David and Mark.
Okay. Thank you Kelly.
One moment, while we prepare for our next question.
Our next question will be coming from Mark Miller of.
Benchmark company your line is open.
[music].
Your line is open.
Hey, Mark.
Okay.
There was a glitch on the.
Just had a question.
Adjusted your year end.
Total sales down somewhat and I was just wondering and you attribute that to several factors.
Wondering what percent of that change was attributed to the new restrictions.
Okay.
Yes.
I should say that there is a.
Probably I shouldn't say there was a pause right there.
And those policy as well.
Whereby U S pods right and so that's what will be now the shape.
All you have the founder of <unk>.
<unk>.
Other source by combining stores, that's the portion of her daily L. Sherman.
That's something push off and also we still do have some constrained.
From non USA parts right its really.
Tighter control for the constraint of them <unk>, so that the or maybe I'll put two things together that's impact are.
Revenue in Q4.
You indicated the restrictions within past UCP planning tool just to also say furnaces.
Our funnel is though I'll be specific and special for <unk> Rd right. It really depends on pipe.
If not off on us Okay Samsung.
And just one final housekeeping question, what was stock based compensation.
So what was the question Mark what was the stock based compensation stock based comp.
$1 9 million for the quarter.
Okay. Thank you.
Yes.
Thank you Mark.
Thanks Mark.
If you have a question please press star one one.
Well.
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.
Later, and thank you all for participating on today's call and for your support.
Great. Thanks, guys.
Okay.
This concludes today's conference call. Thank you all for joining and have a good rest of your name you may all disconnect.
Yeah.
Yeah.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
Okay.