ACMR (2020 - Q3)

All right. Good day, ladies and gentlemen. Thank you for standing by and welcome to the ACM Research Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, we are recording today's call. If you have any objections, you may disconnect at this time. Now, I will turn the call over to Mr. Gary Dvorchak, Managing Director of The Blueshirt Group. Mr. Dvorchak, please go ahead. Gary Dvo

Thank you, Andrea. Good day everyone. Thank you for joining us on today's call to discuss third 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 and other information that might be considered forward-looking. These forward-looking statements represent ACM's current judgment for the future. However, they are subject to risks and uncertainties that could cause actual results to differ materially. Those risks are described under Risk Factors and elsewhere in ACM's filings with the Securities and Exchange Commission. Please do not place undue reliance on these forward-looking statements, which reflect ACM's opinions only as of the date of this call. ACM is not obliged to update you on any revisions to these forward-looking statements. Certain of the financial results that we provide on this call will be on a non-GAAP basis, which excludes stock-based compensation, a loss relating to a change in the fair value of a financial liability and an unrealized gain trading securities. For our GAAP results and reconciliations between GAAP and non-GAAP amounts, you should refer to our earnings release, which is posted on the IR section of our website. With that, let me now turn the call over to David Wang, who will begin with Slide 3. David?

Thank you, Gary, and welcome everyone to today's call. Our third quarter results represent another product quarter with strong financial results, a new product launching and greater progress on our strategic initiatives. Revenue grow to $47.7 million, up 43%, shipments were $59 million, up 37%. Both revenue and shipments were at a record level. We delivered good balance of growth and profitability, with 43% gross margin and 22% operating margin. We are 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 $92 million of cash. We also had a $24 million of 3D security on our balance sheet from our investment in SMIC STAR Market IPO. I will now discuss recent operational highlights, please turn to Slide 3. Our moment continues in the third quarter. We've had a strong shipment of new products to both our existing customer and our newer customer. We delivered another Tahoe tool, revenue to our lead foundry customers, making out third Tahoe in production environment. We continue to see strong interest from current and perspective new customers. Tahoe delivered unique combinations of strong committed performance while using 80% less sulfuric acid. We delivered two ECP ap tools for repeat order shipments to our leading packaging customers. Our Ultra ECP ap is a backend tool that provides better 3D performance by putting a more uniform metal layer at a notch area. We also delivered first tool of the new member of – the ECP 3D to a leading foundry customer in China, the Ultra ECP 3d is a front end tool that offers enhanced gap filling for high aspect ratio TSV applications, which is a critical technology for high-density stacking of 3D chips, as our customers moving to more of advanced production node. In September, we delivered second-generation TEBO tool, to our existing lead customer. We had significant technology upgrade, including a process that delivered a higher particle remove efficiency, PRE with a wider [indiscernible] process window. We expect this will help accelerate the adoption of TEBO. This is the first tool and we expect revenue recognition upon qualification and acceptance. Also last week, we announced an important milestone for TEBO, where United States Patent and Trademark Office approved our fundamental TEBO patent. This strengthens our leadership position in advanced damage-free megasonic cleaning technology for sophisticated 3D semiconductor device structures with patent protection for nearly two decades. Our third quarter shipments, including multiple, semi-critical, first tool to our newest customer are did in China-based analog and power IC manufacturer. Their first tool includes scrubber, sprayed wafer backside cleaning tool, auto wet bench, and also SAPS-II cleaning tool. We expect acceptance and revenue to be likely 2021 events. Look at this graph achievement. I'm proud of our engineering team. Over past several years, the team has added many new and innovating platform to expand our product, offering beyond our flagship cleaning tool to ECP training tool, SFP polish tool and in vertical furnaces. Now turning to Slide 4. For those you are new to ACM, I will reveal our product portfolio and the market opportunity. We estimate our current product portfolio addresses $5 billion of the total market opportunity. This spans DRAM, 3D NAND, foundry, power and analog application devices. Our core market as for cleaning tool starting with our flagship single-wafer cleaning product, SAPS, TEBO and Tahoe. And our fluid semi-critical cleaning product. We estimate this tool address about 80% of the $3 billion wafer cleaning market for $2.4 billion market served by ACM cleaning products. Our newer products add a $2.6 billion, including $1.6 billion from the vertical furnace $5 million each from ECP and stress-free polishing products. We are focused on gaining market share by expanding our product line and winning new customers. Our roadmap extends many years in the future. We have an unwavering commitment to expand our market opportunity with new products. Could you turn to Slide 5 for discussion of our customer base. We have five major front-end customers across in DRAM, foundry and 3D NAND. We have several back-end wafer packaging and assembly customers. And our newest customer manufacture power and analog device. We believe those customers alone represent a significant opportunity for ACM. Many of them are still in early and middle stage of a multi-year capacity capacious and are only buying a fraction of our full product portfolio. Naturally we expect to continue to add new customers as we believe every major semiconductor manufacturer can benefit from our technology. As we discussed on previous call, we are actively engaged with a number of potential first year, new customers in North America, and Taiwan. Please turn to Slide 6. We are actively adding production capacity and the development capacity to support our near-term and long-term growth trends, our regional facility in Shanghai remains, headquarter of ACM Shanghai, which including our R&D, SG&A and prototyping and production of newer products. We began production at our second factory in September of 2018 and open the second floor for the production in the third quarter of this year. This increased capacity at our second factory from $250 million to more than $350 million. Our long-term solution is Lingang facility, which will become our R&D center, providing employee housing, and we'll have the floor space to increase our production capacity by five-folds. We broke ground on Lingang facility in July of this year and plan to begin production by middle of 2022. Before discuss our 2020 outlook, I would like to discuss few important items. First, I want to address the short seller report that was published in early October. We [indiscernible] by comments made in our October 8 responsible press release and we’re fully refused the allegations made in the report. Over the past few weeks, ACM Shanghai, China IPO team, which includes the item, the IPO in asset banker, CDO, our auditor and CWN, ACM Shanghai, China team has performed a detailed review of all the allegations. Most of the items were easy to refuse as a 43-page report from the short seller included mainly risk statements of facts, contradictionary opinions, and a general meeting on the spending of our industry, for other items, the team performed complimentary lag work, including interview with the customers, suppliers and management and a documentary reveal. The team has delivered a comprehensive report of their findings for the Shanghai Stock Exchange Commission. This report fully filters all of the allegations on a point by point basis. At this most point, we now decided we will release the report. We are happy to take any questions after the call. Second, update on ACM Shanghai Stock market listed in later May, 2020, we submitted IPO application through Shanghai Stock Exchange Commission. After too long our question and answer in late September, the STAR Market listing committee approved application. At this point, the listing is subject to submission of a formal registration and reveal and approval at the China Security Regulatory Commission, with the timely registration, we expect to launch the process later this month and price IPO by year-end. Before I turn the call over to Mark, I would like to discuss our 2020 outlook. Please now turn to Slide 7. Looking forward, we're excited by our business opportunities, we remain optimistic about the remainder of 2020 and our growth prospects for 2021 and beyond. Accordingly, we have updated our full year 2020 outlook as follows. We have reached in low end of our range. We now expect revenue to be between $145 million and $155 million, compared to the prior range of $140 million to $155 million, that revised revenue range represents 39.5% revenue growth at the middle point, the implied revenue at the middle point for the fourth quarter represent 58% year-on-year growth. Our outlook for the remainder of 2020 is based on several key assumptions. First, COVID-19 situation remains stable in China and does not worsen on a global basis in the coming months. Second, Chinese semiconductor industry fab investment continues. Third, the revenue range assumed good growth from NAND and foundry lobbying [ph] customers and muted the DRAM recovery. Our outlook also assuming limited contributions in Q4 from SMIC. Our results and outlook of balance sheet is a successful execution of our strategy. Our strong growth is providing the capacity to our factory. Our R&D spending new products and deliver the profitability that our investor expects. We’re building a global sales and marketing resources to panacea new customers in new regions, and we are scaling production capacity to support our long-term growth plan as we continue our mission to become major equipment supplier for the global semiconductor industry. To conclude, I would like to thank our employees for their hard work and dedication. I also want to thank our customers, partners and the shareholders for their continued support and their confidence in ACM Research. I will now hand the call over to Mark to discuss our financial results in more detail.

Thank you, David, and good day, everyone. We had strong financial results in the third quarter. Unless I note otherwise, I'll refer to non-GAAP financial measures, which excludes stock-based compensation, change in fair value of financial liability, and unrealized gain in trading securities. A reconciliation of these non-GAAP measures to comparable GAAP measures is included in our earnings release. Turn to Slide 8. For the third quarter, revenue was $47.7 million, up 42.6%. Growth was driven by solid demand for our front-end equipment and back-end tools. We had a strong contribution of revenue from three of our major front-end customers, and also one of our back-end customers. Total shipments were $59 million versus $43 million in the year ago quarter and $45 million in last quarter. As David noted, this marked another record level of quarterly shipments and important demonstration of scale to the industry. Total shipments include deliveries for which revenue is recognized in the quarter, as well as deliveries of systems awaiting customer acceptance for potential revenue in future quarters. Gross margin was 42.8% versus 49.1%. Gross margin was within 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 $10.1 million, up 29%. The year-on-year increase was driven by higher R&D on new products, higher G&A expenses related to the STAR Market IPO. Operating income was $10.3 million, up 19.8%. Operating margin was 21.6% versus 25.7%. Now some details below the operating line. Non-GAAP results exclude stock-based compensation in two additional items. The first, change in fair value of financial liability is a non-operating non-cash book loss of $6.5 million. As described in last quarter's call and in our 10-Q filings, the liability was related to private equity investments in ACM prior to the 2017 IPO. The PE investment was restructured through a number of agreements to comply with the STAR Market IPO. The liability was terminated on July 28 with the issuance of an equity warrant, after which it became a balance sheet item and will no longer impact our impacts – our income statement in Q4 and beyond. Second is the unrealized gain on trading securities of $9 million from our SMIC investment. The investment was mark-to-market at quarter-end, and the gain reflects the increase in value from the original IPO price. We will exclude this item from the non-GAAP results until the gain is realized when or if we sell the shares. Net interest expense was approximately $0.1 million unchanged from last year. Other expense was $1.8 million versus other income of $1.8 million. This is a significant year-on-year swing of $3.6 million that impacted our bottom line. Other expenses primarily due to realize gains and losses caused by currency fluctuations on our working capital during a given quarter. Tax benefit was $1.7 million versus $0.3 million. The large benefit in Q3 of 2020 was doing part to option exercises, which had a favorable impact on our global tax rate. The 2019 results also included a benefit that resulted from the release of valuation allowance. Our tax rate can have big fluctuations on a quarterly basis for a number of factors. We suggest you model 12% to 14% non-GAAP effective tax rate for future periods. Non-controlling interest was $1.4 million versus $0.3 million. This line can vary as well. We encourage analysts to model about 8.3% of net income for this line item as a proxy for the minority interest in ACM Shanghai held by PE investors. Net income attributable to ACM Research was $9 million versus $10.3 million. The currency and tax items contributed a net benefit of $0.3 million in the third quarter of 2020 versus a net benefit of $3.4 million in 2019. Net income per diluted share was $0.42 versus $0.53. If we exclude the currency items as discussed above and normalized tax at 12% the apples-to-apples comparison is $0.40 versus $0.36. Now we reviewed the balance sheet items at the end of Q3. Cash and equivalence were $92.2 million, up from $86.4 million at the end of Q2. The quarter-on-quarter increase was due primarily to net cash provided by operating activities and our higher draw on our line of credit. In addition to the cash balance, we also had trading securities of $24 million on our balance sheet related to our SMIC investment. This is treated as a current asset as we were locked up for a year from the initial share purchase date. Short-term borrowings were $28.3 million, up from $25.8 million at the end of Q2. Totaled inventory was $64.2 million, up from $49.7 million at the end of last quarter of the total finished goods inventory increased to $23 million from $0.17 million at the end of the last quarter. The $6 billion quarter-on-quarter change represents a net increase of first tools that have been shipped to customers for valuation. Note that finished goods inventory is carried on ACM’s balance sheet at cost pending customer acceptance and future revenue recognition. Year-to-date, we’ve spent a total of $16 million on Lingang related investments. This includes $9.3 million for the land rights and $7 million in deposits for employee housing. In addition, we’ve spent $3.7 million in capital expenditures. We anticipate another $9 million to $10 million of Lingang facility CapEx and employee housing in the fourth quarter for a total of $29 million to $30 million of total CapEx in Lingang related spending for the full year. To conclude, we are participating the growth of major new IC fabs. We are ramping production, and 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 open the call now for any questions that you may have. Operator, please go ahead.

Thank you. Ladies and gentlemen, we’ll now begin the question-and-answer session . [Operator Instructions] Our first question comes from the line of Patrick Ho from Stifel Nicolaus. Please go ahead.

Thank you very much, and congrats on a nice quarter on outlook. David, maybe first off in terms of the market environment, you’ve obviously posted very strong shipments and revenues in the September quarter. Can you discuss with your customer discussions whether you’re seeing an accelerated shift of a localization effort? And how that’s potentially helping you as you look at 2021 as a whole? Are you seeing more chip makers come to you as they – as the geopolitical tensions rise and the effects of that for your business?

Okay. Hi, Patrick, thank you. Okay. There – this year, Q3, we have very strong quarter achievement, and we also – we see the continued that as a trend in Q4. And also we have good indication given the first half of the next year. However, as we normally give projection of next year, normally by early January. So probably, we’ll do those next year guidance by the time. Again, this is a real, I see their opportunity here wherever – fab continuing last month, our major customer community expansion of fab. And we were also see that – these are the recovery at some point next year. I’ve also do – we do have new customer and adding our customer base and also we’re see their also new product, either qualifying ECP, semi-critical really cleaning tool and also Tahoe, including also our recent vertical furnaces. And we’re seeing above the – contribution from those other top products by end of Q3, we have about $40 million deferred revenue in end of the Q3. So Mark, anything to add on that.

I think, you covered it well. Patrick, if you have another question.

Mark, my follow-up question more for you. So you mentioned inventories went up primarily due to the inventory you were building for some of your evaluation units. Given that there's still a little bit of disruption in the supply chain related to COVID and the ability to procure parts other equipment companies have talked about just building a standard inventory for parts given the increase in demand. How – can you just give a little bit of color of whether you're building any inventory for your general core product lines, whether you need to do that as well? Or it has the supply chain basically opened up enough, where you feel comfortable in the procurement of key supplies and parts.

Yes. Thanks for the question, Patrick. Yes, so first on the – yes, you did call out a lot of the inventory uptick was from demo tools. So that was a big factor and we carry those costs and those are really a number of tools that – a range of tools that our customers are evaluating. And typically two to four quarters, we'd expect to take revenue on them. In terms of our overall chain, it's – there's always work to be done on that. We did see some lead times with some items. I got a little longer, but we're working really closely with our suppliers. We don't feel like we’re really built any additional inventory, because of the any potential tightness. The inventory that we may have built up was really just in front of a good ramp that we expect next quarter.

Great. Thank you.

Thanks, Patrick.

Thank you, Patrick.

Thank you. Our next question comes from the line of Charlie Chan from Morgan Stanley. Please go ahead.

Hi, good morning. Good afternoon. So again, congratulations for your great future. And I would say, you had a citation about that [indiscernible] reports. I think that was very helpful. So as usual, I was I still on to fill out your progress at some top line customers for TEBO the leading logic foundry, and those are the U.S. memory accounts. Can you give us some updates here? Thank you.

Great. Again, we’re still continuing work with our leading customers, probably both in Taiwan and also in North America. And also I should say, there we're making progress and especially, one of the leading customers they're very familiar with our tool and we're talking about for the demo tool. And hopefully by end of this year, we can receive that demo tool and will deliver probably next year. And you mentioned you probably there is another six to 10 months of the qualification. Meanwhile, as I said, we’d be working with a multiple other customer in North America and also in Taiwan. And the next year will be another exciting year for us to penetrate in top tier customer. And the reason I say that we have some confidence, our cleaning tool TEBO and Tahoe and flash also has to be customer in Taiwan entry for premium tool. So again, time is going on and we’ll deal that progress.

Okay, good. So I think you must lead that there's a big M&A announced that entails constituted to certain high mix. And since the high needs the customer you have disclosed. Do you think that is the kind of the tailwind for you to spend your business in NAND flash after this merger?

Yes, definitely right. I think obviously, I heard this news, right, and that a possible time I heard that not even really happening very rapidly, it properly will take a couple of years to finish all their completion of the M&A. But anyway because of the needs of our customer, and also there's a fab or inter-fab locating in China. So we see the good positive fine for us, and to get into this 3D NAND, plus we have a lot of our process build up, in our one PC in Wuhan. So we are very familiar with 3D NAND process. And as I mentioned, our fabs and our future path and also even three semi cleaning process tool also contributed a lot in the 3D manufacture business. So it's good sign for us.

Okay. Thanks. And next I want to follow-up the question on the first speaker about the China CapEx. I know you cannot defer to them to new one for the time being, but in terms of the China CapEx for 2021, do you think the CapEx size is going to be larger this year because of there could be some challenges, for example, if SMIC already had around a $6 billion to $7 billion this year, so it's going to be a tough comparison for next year. And also I heard that there could be some scrutiny about China made project because they were some project when that click has for our ROI was too low. So what will you think about the China CapEx size for 2021 compared to this year? And what would that mean to you to 2021 growth? Thanks.

Okay. So far, and I think our customer like 1TC and Huahong and also a new revenue customer, including even customer too. We have very good plan in this case next year. And that's why we see there, good indication for the first half of next year and continue spending. Regarding, as I might see obviously, it's – this moment we are not assured what's going on, right. And is that there to be released the – loose of the license for the 28 nanometer [indiscernible] node. We don't know yet, but we are really probably watching the progress. At ACM this moment, which you can supplier to and to the SMIC, we’re expecting those features and getting improve and they can give you their 28 nanometer to Beijing. And that was something we expected an expansion, if all this nice involvement to got us all. So we're like keeping cautiously watch out progress, right?

Okay. And lastly, I'm not sure if you can talk about this here. But what is that expanded market cap of your China subsidiary for the IPO?

That's a good question. We are in the sensitive period. I really can’t you know comment on that, but one thing, you look at our market cap in a non-stock and all you're looking other semiconductor equipment company in the stock market, right. There'll be S&P ratio is a multiple of the U.S. but anyway we have our – I should say past year and expectation and for us to be a good pricing at IPO, right. Rather than a good pricing and a bad influence for the company and for us it was a bad news in that interest.

Okay. Got you. Thank you very much.

Thank you. Our next question comes from the line of Suji Desilva from ROTH Capital. Please ask your question.

Hi, David, hi Mark, congratulations on whole progress here. So a couple of specific questions, maybe on the Ultra C Tahoe product, you've had success in the Foundry segment is the memory customer base looking at that aggressively, or will that take longer?

Okay, good. Actually our Tahoe product, we are shipping three product or 80%, right, including that first one. And this all comes with the fundraiser – repeater order customer. And so they like it through and they like this product. That's why I had to keep give a two additional into the order. And we do have a good conversation and engagement with multiple memory customer and also another Foundry customer too. So we bid, well, I can multiple Foundry customer to by the way. So we think that is a powerful tool, it will give our customer benefit in terms of control the chemistry, consumption, well it's 80% or more, and also at the same time provide a good a performance. So it was expecting more customers for that tool. And we're also expecting that to give a good contribution for revenue next year.

Okay. And my follow-up question is, could you update us on the China analog customer that you announced last quarter, also the U.S. OEM partnership those two new announcements last quarter, any update there? Thanks.

Yes. Okay. I think there, as I said, we do have a few new customers in analog and power devices, and we’re delivering a tool and especially, highly to the one of those customers, another customer, where probably what delivery having in Q1 next year and there also, we have our – I got OEM customer to U.S. and the tool we’re already qualifying their process. And I think that they like our performance in terms of cleaning. And I hope it’s just the cleaning capability, where we’ll add this benefit to be in-house there to a quality. So, we’re working very well.

Great. Thanks, guys.

Thanks, Suji.

Thank you. Our next question comes from the line of Donnie Teng from Nomura. Please go ahead.

Good evening. Good morning, David and Mark. Thank you for taking my question. My first question is regarding to the assumption of your 2020 guidance. So in the 0.4, you mentioned about your outlook assumes limited contribution in Q4 from SMIC. Can I have some more callers on this assumption? The reason is because I think, not all the equipment or material suppliers received U.S. government’s notification are not shipping any equipment to SMIC. So, just curious about if we are a little bit too conservative to assume, we have limited contribution in Q4 from SMIC or is any other reason behind? Thank you.

Okay. Actually, we have a good to deliver while in Q2 and Q3 for SMIC. and we consider in this year, the contribution standpoint for SMIC maybe, 10% to 20% in that another range. We’ll not see, for next year, is really don’t know. But so far our all the peer we’ve seen so far or request mix so far would keep on schedule, right. And so as a matter over next year, how much they can – their expansion probably where just I said that watch carefully and maybe, cautious to see the progress. So for next year, we’re not going to put too much comp in the projection for the SMIC in our next year’s projection. Maybe, the thing I’m changing, but anyway, this moment will cautiously project revenue contribution for next year.

Okay. So, David, sorry. So, I’d just rephrase what you say. So, basically we have gained quite meaningful shares at SMIC in Q2 and Q3. So in Q4, probably, the momentum is temporarily slowing down, maybe due to customers’ sales recognition schedule. But another thing I would like to clarify is that just wondering have you – have ACMR received any notification from U.S. government or not? So, if we don’t receive anything, does that mean we can continuously ship into SMIC as long as they are still investing into the capacity extension?

Let me say again, I think there are clean technology as our product and IT has been developed in Shanghai, right about 2006-2007. So, I should say, I couldn’t comment later, but we really kind of see that if you can deliver to SMIC that’s based on their export control law in the U.S. and also our consulting work with export control lawyers in the U.S.

Okay. Thank you. My second question is regarding to the gross margin, I know Mark has already said that our long-term target is like 40% to 45% range. But could you elaborate more on what kind of a gross margin level we have on different kinds of equipment as we now have quite diversified equipment in the pipeline. So, could you give us more color on how should we rank the gross margin by different kinds of equipment? Thank you.

Yes. David, do you want me to answer that or do you want to take?

We’ll its really high level maybe and give more detail.

Yes.

I should say obviously, I look at the here single waiver tool as a more high margin and they’re that people in Tahoe. and then you look into our semi-critical, I called it pod cleaning tool and auto bench is a pretty mature technology. So, they have a lower margin for this way and also scrubber low margin. And therefore the backside community that’s a pretty good margin. Regarding the cleaning tool, you also have a frontend and the backend for the advanced packaging, also for the frontend premising covering their connection in regular margin. And for their packaging is very – because of a competing place from their – I call it a packaging house, but that margin would be lower than in frontend. Yes. let’s go to the vertical furnace. That’s pretty fine, right. I should say the medium range of margin. And so that may basically layout to the margin wise. Again, every quarter, if you’re from the combination on different kind of, I called, the product mix. So that’s why our margin can be some high go higher, some high go lower. but as that’s in their premier timeline would still project a margin between 40% and 45% as really a bad as the team advanced too astounding versus revenue and also sometimes in crafts by customer, they do need, we make are all more portfolio product. but it’s going to balance, right. And there, I still say 40%, 45% is our near -term, next few years margin target. And Mark, anything you want to add?

Yes. Thanks, David. You covered most of the points. I mean, just to summarize big picture in our ACM, every tool we provide, there’s going to be some innovation. We don’t like offering me too type products, some of them are lot more than others. So, like David said, our flagship cleaning tools, SAPs, TEBO, Tahoe, and ECP. Those will get really good margins and we have good margins for us semi-critical as well but they're lower than some of the flagships, but we try to balance strong innovation with a very good cost structure to deliver the gross margins in that range.

Great. Thank you, David and Mark.

Thank you.

Thank you. Next question comes from Charlie Chan from Needham and Company. Please ask your question.

Hi David and Mark good evening, good morning, depending on where you are. My first question, maybe a quick follow up to Donnie’s question asked on SMIC. I heard that you probably qualify – qualitatively, gave us a picture about demand profile of SMIC this year. Can you provide a little bit of a quantitative help to us, how much of a revenue exposure do you have to SMIC this year? Any of the direction – direction or comment would be great. Thanks.

Okay. Probably I should say that is last two years, our revenue from the SMIC is about less than 10%, right, that's the range. This year actually we saw increase and probably the range – this year, depending on also fourth quarter ending likes the backing 14%, maybe, 14%, 15% range in terms of revenue coming from the SMIC, so that’s this year’s percentage, obviously increased from last year.

Great, that's really helpful. Thank you. So my next question is actually a three-part question really about the market demand outlook. So looking at your revised 2020 outlook, there’s a slight growth rate exactly like you said it's about 40% for you, we know that the SK Hynix, one of your leading customer, their spending is likely much lower than last year, but the domestic China WFE is up from about 6.5 billion last year to about 10 billion plus this year. It looks like you have outperformed the market and gained some market share in domestic China. But my question really is about next year, do you expect that kind of strong double-digit WFE growth from domestic Chinese customers? And do you see additional share gain opportunity among those customers?

Okay. Let's command on Hynix, this year we do had order appeal from the Hynix and also we will see some pickup in Q1 next year, too. Then we are expecting DRAM pricing go reasonable and we are expecting there expansion on their DRAM fab, right. Probably both in China and also in Korea. And for other domestic customer in China, we see very strong demand there. As I mentioned we have top line, 1PC [indiscernible]. And also we see our newest customer even, DRAM customer Huawei, and also we have new hard devices and also this anode devices customer. And we also do it to see additional new customer in other regions, either their product is or their product in their power devices couldn't continue, maybe become a new customer next year for our revenue pipeline. And beyond that, as you say, we're real active working with a customer beyond China, in mainland China, customer in Taiwan, customer in the U.S. So ACM goal is real try to balance ourselves and inside the mainland China or outside China, we believe our product would be benefit the customer globally, right. So that's our – I should say visibility for next year.

Great. So maybe just a very quick follow up to what you answered, do you expect the revenue or maybe let's make it a little bit more generic fab spending of SK Hynix inside China will increase next year or do you see more of us still seeing a lot of uncertainty around that?

So far I see there, continuous glean glow. Well, you look into this year, next year, I didn't see any slowdown. And again, if bigger situation no changing and I think that trend will continue, right. So we have – as I mentioned, even have a good indication first half next year. And we're completely expecting ACM continue to grow in the market. And most glorious moment in a domestic mainland China, but also expecting a grow outside China too.

Hey, Charlie. I might add.

Yes.

Hey Charlie, if you don't mind, I would just kind of add just from a big picture perspective. We're planning for growth next year. And I think as David mentioned a general tailwind of our major customers that are in early to middle stages. We would plan for some sort of a DRAM recovery at some point next year. We see good opportunity to gain share with our new products. And then our new customer that we're delivering a lot of tools to this year. I think David mentioned the finished goods inventory we have it's about $40 million worth of revenue. So there's a lot of things that that drive our optimism for growth next year.

Thanks for the color Mark. Maybe my last question probably following up either Patrick or Charlie ahead of me on the inventory, I think I understand, you have many evaluation units in the field of which either as new products or existing products that the new customers, we kind of speculate in the growth phase. Why your inventory, especially the finished goods parts could remain high relative to your peers. But I just wonder since your days of inventory as well slightly in the high end if I look at that your peer group still within the range, but still stay at the high end of slightly above 200 days. Do you see a path over for that number to go down below 150 days? I just want to understand how you see that a trend and what kind of timeframe you are seeing in that aspect?

Maybe a comment or timing and more for the existing tool or called a mature tool go to the new customer at typical time, I should say six months or one-year, because customers try to verify yield everything, right, even the existing mature tool. And second one is really new took and to the most, either new customer or existing customer, those kind of new tool, and you need to send the notifications, but then qualification. So those kind of normally one-year, right, and so again we’re in expansion of our new product and especially vertical furnace, again we'll give one example. We are moving a tool – the first tool by the Q1 this year and we're expecting probably by – end of this year, we can quantify if now maybe Q1 next year, so about a one-year timeline. So again, it's – this, last year this year including the future with your continual extending a new products and also that's really probably impact some of their, I called her defer revenue or finished goods. But again, that's the process, that we have a ticket. As time going up, all we have more of a – when the product become mature, and I think we will see that is shrinking or re-facilitating the time, but it’s just staggering out. Hey Mark, anything on that?

Yes. No. you bet. Thanks, David. Yes, Charles, the one thing I'd add is, I'd encourage you to look at our inventory without the finished goods, right? I mean, the finished goods, again, it'll be two to four quarters for us to get acceptance. We look at that as a positive indicator because it's demo-tools that our customers are looking at and generally new products. And so when our internal models will look at the, we'll break that out to kind of count the days. And we comp them against the peers that you've mentioned. On the – and if you take our general inventory internally, we're very efficient with it. We will build it – we'll move it to around quarters. We'll add if we see a big ramp coming ahead. And so we think our inventories are at appropriate levels.

Yes. Okay thanks for that color and for my question. Thank you.

Thank you

Great. Thank you. Our next question comes from Krish Sankar from Cowen and Company. Please ask your question.

Yes. Hi. Thanks for taking my question; David and Mark. David, I had a question for you first. You spoke about gaining traction with the large – U.S. logic customer, I'm just kind of curious, it's been publicized you struggled with in manufacturing and how are you going to be outsourcing to foundries. The longer it takes for you to get qualified? Is there an opportunity cost where the potential upside for you diminishes? Just kind of curious how to think about that, and then I have a follow up.

Okay. Mark, you want to address that or...

Yes. No, I can hit that. So, Krish you asked a little bit about me for winning a big logic customer. Obviously the sooner you get, in the better. But we think it's a pretty significant opportunity. And so, whether it's – we'd love to had the demo tool in there last year. But we don't think the opportunity – the overall opportunity really changes that much based on quarter or so here or there.

Got it. That's very helpful. And then as a follow-up, when you guys introduced the furnace product earlier in the year, can you just talk a little bit about where we are in that in terms of either customer adoption or momentum? Thank you.

So, yes our existing customer momentum.

Yes. I wanted to know about the furnace, yes.

Okay. Yes, okay. As I mentioned, the furnace we had delivered the first tool right in the Q1 this year and we'll have a regular progress and we're expecting probably product qualification either end of this year or Q1 next year. We do see additional I call that I call that interest or call that demand from existing and also new customer tool. So we’re expecting to add repeat order also expecting to add new customer in vertical furnace. The reason is really they’re like a local supplier and our product has a regular software control and also the control system, because the vertical furnace one key challenge is stability or I call the software stability and control system stability, because you have more than 100 wafer inside the batch furnace, if something goes wrong, it can be big loss for the customer. With our software has been proving in a cleaning tool in last – over year, we have a very strong and confidence and also to the state of bidding the software in those control system, that's really added the value also add our confidence or the benefit to the customer, our product can be very mature, at the beginning we got to worry about the software all general control figure, for the product. So again, we have – again good demand and good basic technology and also we'll see that will adding more of a revenue next year, and they have another product we tried to get in. At this moment we’re in app utility and we’re spending probably from now on to the high temperature neo and possibly we’ll get into ARB business, so as we’re going to future, right, $1.7 billion, $1.6 billion market, we have a very good expectation for this product.

Thanks, David. Thank, Mark.

Thanks, Christian.

Thank you. As there are no more further questions in the queue, I'll now turn the call back to Mr. David Wang for 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 events releases – events. Gary, please.

Hey thanks, David. On November 11, we'll attend the ROTH’s virtual technology conference. On November 12, we'll be at the Benchmark Technology virtual one-on-one conference. And on November 17, we'll participate in the Craig-Hallum Alpha-Select virtual conference. Attendance at all of these conferences is by invitation only, so please contact your respective sales representatives if you want to schedule any one-on-one meetings with us. This concludes the call, so you may now all disconnect. Thank you.