ACM Research - Earnings Call - Q2 2020

Transcript

Operator (participant)

Good day, ladies and gentlemen. Thank you for standing by and welcome to the ACM Research Second Quarter 2020 earnings conference call. At this time, all participants are in 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. Thank you.

Gary Dvorchak (Managing Director)

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 is 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 Fang, the CFO of our operating subsidiary, ACM Shanghai. Before we continue, please turn to slide two. 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 in 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 three. David.

David Wang (CEO)

Thanks, Gary. A word from everyone for 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 the market globally. I would like to recognize the great effort of our ACM team as we've adapted 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 operation, with nearly all of the 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 two foundry customers. Shipments were $45 million, up 36% year over year, and a strong rebound from the pause in Q1. We delivered a good balance of growth versus profitability, with almost 50% gross margin and 21% operating margin. We remain committed to delivering profitable growth as we continue to invest in R&D for new product 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 50-year land right to build our new facilities and employee dormitories, and the $40 million investment in SMIC's stock market IPO. I will now discuss recent operation highlights and customer activities. Tahoe continued to gain traction in the market. In Q2, we delivered our second Tahoe tool to our lead customer and recognized revenue upon shipment in the quarter. During the remainder of 2020, we expected to deliver another Tahoe tool to our lead customer and to deliver demo tools to several other customers for evaluation. We are also seeing good momentum through our ECP MAP program. The ECP MAP is a front-end copper plating tool equipped with ACM's proprietary technology to deliver 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. In July, we already delivered additional demo tools to another leading China-based foundry. At Semicon China in June, we introduced our UltraSeed SAP 6 tool, which is the latest addition to our UltraSeed SAPs cleaning product family. The SAP 6 supports the increased sales demand of our DRAM and 3D NAND flash customer. The SAP 6 features 18 chambers versus 12 chambers for SAP 5, but comes with the same tool width and slightly increased length 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 SAP 6 first tool to support production ramping at a key memory customer. 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 listed in slide four. Yesterday, we issued two press releases that evidence our significant progress in our business development efforts. First, we announced a total of $36 million of purchase orders and participating in the final stage of bidding process with two 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 vehicles, etc. ACM will supply a range of our newly introduced semi-critical tools, including our scrubber, backside wafer edge tool, our auto wet bench, our SAP 2 cleaning tool, and our copper interconnector 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 chose ACM due to our technology leadership and the benefit of R&D and production capability in China. We believe the proximity of this customer to a new income facility can lead to a strong long-term collaboration for future business opportunities. Second, we announced delivery of our SAP 2 tool for R&D to add to U.S. demo labs of our 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 SAP technology is being evaluated for its ability to complement this OEM tool in order to enable OEMs to deliver better performance to its own customers and more advanced nodes. We have begun installation of the SAP 2 tool in a lab with 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 every major semiconductor manufacturer can benefit from our technology. Now, let's turn to slide five. This represents ACM's view of a market opportunity addressed by our full product line. Our available market is 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 a $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 the ECP and SFP products.

ACM is focused on gaining market share by expanding our product line and winning additional new customers. Our current roadmap extends many years into the future with a strong commitment to expand our market opportunity with new products. Now, an update on several major strategic efforts for 2020. Please turn to slide six for discussion of our production capacity. In early May, we finalized the agreement to acquire land rights in Lingang region of Shanghai, 30 mi from ACM Shanghai headquarters. This will be the future site of our fully owned R&D and production facility, as shown on slide seven. We had a groundbreaking ceremony on July 7 to mark the start of construction for the facilities. The new 1 million plus sq ft of R&D and production facilities will incorporate state-of-the-art metrology tools and ACM's own family of process tools for R&D and custom demo.

It will also include leading-edge manufacturing systems equipped with advanced automation 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 late May. Our application is now in a common period phase with Shanghai Stock Exchange. If all goes to plan, we continue to expect to price in IPO by year-end. Finally, I would like to discuss our investment in connection with the SMIC's IPO on the stock market. We invest RMB 100 million or $14.2 million to participate in partnership formed to purchasing IPO share of SMIC. The partnership used all of the funds at the risk 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 16th and raised more than $6.6 billion. We congratulate SMIC on its stock market listing and offering. On August 4th, SMIC announced a collaboration framework agreement with the Beijing Economic Development Zone. For phase one, they will invest $7.6 billion to build their 28-nanometer and above node fab with capacity of 100,000 wafers per month. We are honored to be valued suppliers to SMIC, and we are working closely with both their 40-nanometer and 28-nanometer teams and participating in the fab expansion in Shanghai and Beijing. We expect SMIC to become one of the top three customers in the near future. Before I turn over to Mark, I would like to discuss our 2020 outlook. Please now turn to slide eight. Looking forward, we are excited about our business opportunities and remain optimistic about our future.

Let me share our current outlook. Since the first quarter, we have received improved indications 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 forecasts, and a 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-$150 million. The revised revenue range represents 37% annual growth at the midpoint. 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 a net customer and a muted DRAM recovery.

We believe our updated guidance reflects that we are successfully executing our strategy. We are investing in R&D and enhancing the current product line and to develop new products. We are building our 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. 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 dedication. I also want to thank our customers, partners, and 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.

Mark McKechnie (CFO)

Thank you, David. Good day, everyone. We had strong financial results in the second quarter.

Unless I know otherwise, I will refer to non-GAAP financial measures, which include stock-based compensation and a new line item, changing fair value of a 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 slide nine. 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 two 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 40-45%. 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. I want to provide some detail below the operating line. Our GAAP result 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 non-operating, non-cash accounting entry that is excluded from our non-GAAP results. It resulted from an agreement that was required for the stock 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 stock 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 30th to quarter end, which caused a $5.4 million non-operating, non-cash book loss in our Q2 GAAP results as it was marked to market. This liability was terminated on July 28th when SMC selected the warrant alternative and entered the agreement in which ACM issued a warrant. The history of the SMC investment has been disclosed in detail in 10Q, 10K, and 8K 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 stock market IPO. Moving on, net interest income was $0.1 million versus the 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 stock market IPO application. This was partly offset by the investments David mentioned in the Lingang facility, 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 (participant)

Thank you so much. Ladies and gentlemen, we will now begin the question and answer session.

As a reminder, if you wish to ask a question, you will need to press star and one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Again, it is star and one if you wish to ask a question. Our first question comes from the line of Ken Walton from Needham & Company. Your line is now open.

Ken Walton (Analyst)

Hey, guys. Congratulations on the nice results and the higher outlook for 2020. David, 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? It sounds like it is for a pretty full suite of your wet cleaning products.

David Wang (CEO)

Okay. Thank you. Actually, this is two new customers. We are at penetration in the China market.

As we indicated, both customer major products are analog and also power devices such as IGBT. I think we got a very good attraction from them. Both companies ordered multiple products, and as a total of $36 million, we're still negotiating more of their PO on their progress also. It is a very good market in China. As I mentioned, this is a fast-growing and analog for 5G and also electric vehicle IGBT devices. We can see additional customers maybe come out to play in this field. Our semi-critical process tool, which is the Auto wet bench and back-side cleaning, and also their scrubber and also some SAP tool, as real, they like it very much. Also including customer interest in our copper plating tool. As the progress going on, I can see our vertical furnace will also attract their attention.

They will also be talking about future vertical furnace application, either MPCVD or high-temperature needle in their future application. David, just to confirm, this is more than just bids going out. These are confirmed orders that you have now received from those customers. Actually, $33 million is a portion of the PO, portion of the final bidding process. The typical Chinese customer and some customers, they have to go through the formal bidding process. However, before the bidding, they are going to mostly select the technology, specing, and all their requirements they feel comfortable. They can put in the bidding process. Yes. Both.

Ken Walton (Analyst)

Okay. Okay. On Tahoe, congratulations on the second shipment of a production tool. I think you also mentioned delivering additional eval tools 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?

David Wang (CEO)

Yeah. Okay. I should say this moment, we're talking to their existing customer base. Also, we see the interest also from new customer base too. We see a couple of opportunities right now. Hopefully, we can capture both.

Ken Walton (Analyst)

Great. Just last question for me on the U.S. delivery of the SAP 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 IDMs come into that demo lab. They see your SAP tool.

Hopefully, to the extent that the U.S. OEM sells its process tools, you would gain SAP's orders as part of that equipment set. Is that the right way to think about that arrangement?

David Wang (CEO)

Yeah. Let's give you the background. Actually, this is OEM customer. Obviously, we have NDA. We're not allowed to disclose name. They have a special requirement to do actually a pre-cleaning process, or maybe also post-cleaning process. They found our tool is running very well. From there, we're actually a common customer in Asia. The critical and the process for their process working well is a real pre-cleaning. That's why they identify our cleaning tool as a very critical element for enabling their better performance. That's the point of selecting a tool. From our point of view, obviously, we view this as a good partner.

They value our tool and also help in process. Hopefully, this integration process will make both benefit. That is why we are looking for a lot of effort together. Actually, our tool has been installation finished in this demo lab of their OEM customer. We are expecting our cleaning capability will enhance their performance. Therefore, end of the day, get a better penetration for their next-generation device in the customer site.

Ken Walton (Analyst)

Great. Thank you, David.

David Wang (CEO)

Thank you.

Operator (participant)

Thank you so much. Thank you so much. Once again, ladies and gentlemen, if you wish to ask a question, it is star and one on your telephone keypad. We are limiting up to two questions. Your next question comes from the line of Patrick Ho from Stifel Nicolaus. The line is now open.

Patrick Ho (Managing Director)

Thank you very much and 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. We are 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? Is the timing, from your perspective, within the range that you looked at for 2020 as a whole before COVID-19?

David Wang (CEO)

That is a good question. Actually, a lot of existing customers, they already give us a prediction or projection even early beginning of this year, right? That is something I think our existing customers so far have followed their plan.

They are also, I should say, executing the plan very well and not much impact by the COVID-19 after this January timeline. We see additional new customers come out. Like I said, there are two new customers we have PO and also bidding process. They pretty much also come to our attention or they become our new, I should say, our new breaking-through customer. They are also increasing their building the fab, and they are going with their next end of this year, obviously continue to invest next year. From this point of view, I should say the Chinese semiconductor equipment continues to grow. Even we see the better next year growth. From so far, our information we got from the customer side, next year is a better year than this year.

Patrick Ho (Managing Director)

Great. That's helpful.

Maybe as a follow-up question for you, Mark, in terms of the inventory levels, you answered the question on the preparing marks about the evaluation units on the inventory line. At the same time, as you're looking at a bigger ramp potentially in the second half of the year, how are you managing 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?

Mark McKechnie (CFO)

Yeah. No, Patrick, thanks for the question. Our shipments are really looking pretty strong for the back half of the year. We gave you our revenue outlook. The two new customers, those will be shipments, but probably not revenue this year. The factories are going to be pretty busy through year-end. On the supply chain, we've done a lot of work.

I think, as you know, a lot of our supply chain, we're fortunate, is in Asia. China's 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. We are managing it closely, and we feel we've got that mitigated. Nothing that at this point, or really that we expect, would interrupt our plans for the back half of the year.

Patrick Ho (Managing Director)

Great. Thank you.

Mark McKechnie (CFO)

Yeah. Thanks, Patrick.

David Wang (CEO)

Thanks, Patrick.

Operator (participant)

Thank you so much. Your next question comes from the line of Sujit De Silva from ROTH Capital. Your line is now open.

Suji DeSilva (Managing Director, Senior Research Analyst)

Hi, David. Hi, Mark. Congratulations on the progress here. Very impressive. Thank you. The two new China analog power customers are a new category, I guess, for you guys.

David and 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 relative sizes? Are there additional analog power customer opportunities either in China or globally that become open with this kind of breaking into these two?

David Wang (CEO)

Yeah. Okay. Actually, as I said, it's a new customer, and it's a real indication. This is a big demand and also market demand in China. We view this as a very good opportunity, and we worked with them actually from the end of last year. Actually, the point is really interesting. We're not penetrating one tool by one tool. They give us a batch of the order at one time because they're building their fab very rapidly. Also, our tool has been selected in phase one.

Obviously, when expanding phase two, that's a very good candidate for the selector tool. We are very happy with their so far talking, working with the customer. They are liking our technology. They check all our reference. They found our tool in other customer sites and working very well. That really gives them confidence to give us a batch of order. It's a very good indication. Plus, as I mentioned, there will be leading to other products we are on the development right now. That's a real open big window for us to penetrate into their power device and analog market.

Mark McKechnie (CFO)

Yeah. Hey, Suji. Yeah. Just one thing I'd add in David's prepared remarks. We talked about the TAM. We always have been talking about our core cleaning products.

Previously, we used to talk about SAPs, TVO, Tahoe addressed about 50% of the $3 billion cleaning TAM. With the new semi-critical tools, we have taken that to 80%. I would say we look at it by a product basis across all the different segments. That is where it is captured in our TAM calculation.

Suji DeSilva (Managing Director, Senior Research Analyst)

Okay. Thanks, guys. It is very helpful. Also, on this U.S. partnership you have announced, how does this partnership progress from here? What are the next milestones and time frames for kind of an opportunity from there now that you are in that lab?

David Wang (CEO)

Actually, this is the OEM demo lab. They are probably going to buy one, right, and our tool. Our goal is really working close with this partner, and they can benefit our cleaning technology. Therefore, they can demonstrate a better performance on the customer side.

Meanwhile, this is, I call it, post-and-pre-cleaning. That's definitely an open potential window for us, right, getting to the customer, hopefully, in global and the U.S. 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. 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 their almost particle-free performance. That's really our SAPs and potential TEBO playing, including our Tahoe, right, become there also not just their, I call it, performance, and also we have a very heavy cost saving for their assets. That's really we see more and more demand for our technology and also with confidence.

Almost every customer needs this technology to get into their production to improve the yield and see the chemistry.

Suji DeSilva (Managing Director, Senior Research Analyst)

Okay. Thanks, guys. Yeah. Thank you. Thank you.

Operator (participant)

Thank you so much. Your next question comes from the line of Christian Schwab from Craig-Hallum Capital. Christian, your line is now open.

Mark McKechnie (CFO)

Christian, I think you might be muted.

I am on mute. Thanks. Sorry about that. Congrats on a great quarter. I just have one quick follow-up question with SMIC. 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?

David Wang (CEO)

Yeah. Actually, SMIC has their basically two major efforts, right, expanding their fab capacity. This year, they're already expanding their 28-nanometer manufacturing nodes and above in the Beijing fab.

The one I mentioned, this is a new 100,000 wafer with investment of about a total of $7 billion more investment. That is a new capacity they are talking about. We are very in a good position in terms of this fab 28-nanometer technology. Because they use a lot of our, I call it, core technology, SAPs, TEBO, and also Tahoe. Also, more important, they also use a lot of semi-critical process, auto wet bench, backside cleaning, and also scrubber too. That really becomes our very, I call it, promise and revenue growth driver. Plus, they also have the expansion 40-nanometer fab in Shanghai too. That is also their new technology. They need more of a probably single wafer site, which again, our SAPs, TEBO, Tahoe become important. Also, we have our cleaning tool in front-end ECP MAP.

We believe that both tools will be very important and attractive for them and for their fab expansion too. Further than that, we also try to also work on vertical furnace. We already have one tool that has been testing, debugging in another foundry in China. After those processes be qualified, and we'll also see the opportunity of vertical furnace also can be getting into their SMIC's 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 three 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 2021 event?

Yeah.

Probably, I should say, again, the SMIC has been ordered quite a bit, right, and even their existing 28-nanometer above expansion in Beijing. Probably this year, they're already getting the top three, I should say, right, end of the real final announcement at the end of the year. Obviously, next year, they're getting the top three. We see there's a moment and the Yangtze Memory Technologies and the Hua Hong Semiconductor Group and SMIC will be the top three major players in our customer top list. Beyond that, also I see other continually, I call it, probably mutated recover and DRAM, and that will be added value and added a portion of the revenue from SK hynix and also other new customers in China. Yes.

Mark McKechnie (CFO)

Yeah. Hey, Christian, one other thing.

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. There are some tools that we shipped before that have been accepted that will be taken as revenue. Then there's some other tools that will be first tools this year, and the timing of the revenue on those this year and next year.

Great. Fabulous. No other questions. Congrats on another great quarter, guys. Yep. Thanks, Christian. Thank you.

Operator (participant)

Thank you so much. Once again, ladies and gentlemen, if you wish to ask a question, it's star and one on your telephone keypad. Your next question comes from the line of Mr. Charlie Chen from Morgan Stanley. Charlie, your line is now open.

Charlie Chen (Investment Banking VP)

Thanks. Hi, David. Hi, Mark. Also, congratulations for. Thank you. Yep.

Congratulations for your great results in aiding those new customers. My first question is really about your progress in other overseas customers, including the top foundry customer and also another U.S. IDM. Can you give us some updates for those customer wins? Thank you.

David Wang (CEO)

Yeah. Actually, we're working very close for the top two tier. You mentioned about one major in Taiwan, another one in the U.S. They also have their memory fab in China too. I think this year, we're still working closely, and hopefully, we'll break one. If we're very well, can break two. At this moment, our goal is probably at least break one of their penetration one customer. The reason for that is we found that our SAPs, TEBO, and Tahoe, all three products become attractive for them. Also, their cleaning becomes more and more important right now.

The technology benefit, technology security, and that's their point of interest. We're working on that. When the time and reach there, we're going to make as much as we can to announce that. At this moment, we're still working on that right now.

Charlie Chen (Investment Banking VP)

Sure. Sure. Understood. I guess the next question is to CFO. I'm very impressed by your gross margin second quarter, 49%. 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? Is that 49% sustainable or even see some upside in the long term? Also, just a very, very small question about your one-time financial liability loss. Because the press release suggests that that terminated in July.

Does that mean that you are going to reverse that loss again in the third quarter? Thank you.

Mark McKechnie (CFO)

Yeah. Hey, thanks, Charlie. You managed to get a lot of good questions into your two limits, but it's impressive. Yeah, 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 40-45% on that gross margin level. We don't want to get too excited. We have a big quarter because one or two tools could really move it. We certainly wouldn't be disappointed if we had it kind of in more towards the mid-range of our outlook. Longer term, as we move to scale, we could reconsider that 40-45%.

I think at this point in time, for your modeling horizon, we'd prefer if you maintain the 40-45% outlook. Yeah. Let me take a second on this non-cash, non-operating charge. It really is a technical accounting issue and 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. 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. From April 30 to quarter end, the stock moved about $22. That stock move had to be marked to market, which is what drove the accounting loss. That accounting loss is going to carry into our Q3 result, not in Q4.

The reason it is carried into Q3 is we actually did not terminate the agreement until July 28. We issued the warrant to SMC. At that point, the 242,000 shares of SMC stock were part of the warrant. They go into our share count calculation with no mark-to-market requirement. The other side of it, the loss will never see the book. The loss is not going to come back through our income statement, but it will be seen in our paid-in capital that removes the liability. Like we said on the call, this is a good outcome, forward progress towards the Star Market IPO.

Charlie Chen (Investment Banking VP)

Okay. Understood. If I have any follow-up, I will discuss in a post-call discussion. Okay. Back to the street. Thank you. Okay. Thanks. Thanks, Charlie. Thank you.

Operator (participant)

Thank you so much.

Once again, ladies and gentlemen, it is star and one if you wish to ask a question. All right. Seeing no more questions in the queue, let me turn the call back to Mr. Mark Miller. Operator, we see two more questions.

Yeah. Mark Miller. All right. Yeah. Next is Mark Miller from Mr. The line is now open.

Thank you. And congrats on your new customers and your momentum here. Just wanted to ask, you had some you were developing new tools. The R&D cost went up by almost 50% in the June quarter. Where do you see R&D trending for the rest of the year?

Mark McKechnie (CFO)

Yeah. You bet. Mark, that is a good question. I think we can always start at the year. We have a discipline internally to balance our near-term profitability with investments in the longer-term opportunities.

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. R&D for the year, we'd see it kind of staying at about that level, about the $5 billion or so per quarter. If we see some additional revenue, we might increase that to bring some new products to market faster.

Thank you. 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?

Oh, the second facility. Yeah.

David Wang (CEO)

Maybe a comment on that, Mark, is the new facility is obviously. He's talking about Chuancha.

Mark McKechnie (CFO)

He's asking about the Chuancha factory, I think, right? Mark, are you asking about?

David Wang (CEO)

I'm sorry. We're talking about the Lingang new facility.

Yeah. I'm talking about just generally factory loading with the new facility coming up. Is that going to help you with margins? In the future.

Okay. Yeah. Okay. Good. We have bought this purchased land and rights for 50 years. With that new factory, we'll introduce more of a sophisticated manufacturing system. Also, a lot of automation going on. With that in the process, it definitely will lower our manufacturing costs. Also, more important, will be more of a precise machine on the assembly line and also inventory control. With that system implemented, we probably can control our inventory and also precisely manage the working progress schedule. That, we think, will definitely lower our manufacturing costs.

Mark McKechnie (CFO)

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

Yeah, I mean, we would think that hopefully, we could be in a position to reevaluate our margin range on that front. Really, Mark, when we think about this new facility, there are a lot of things you need to do to be able to attract 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. We think this will help to our efforts with bigger customers.

David Wang (CEO)

Yeah. Actually, we discussed it before. With this, we calculate between either we continue renting a new facility versus we're building our own. In the long run, we talk about probably more than 50-65% saving in terms of rental outside.

More importantly, we can have a building our long-term and strong R&D facility, which normally we cannot spend money on the rental area, right? The five-year have to go a different place. That really makes 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 the R&D lab. That is another benefit with this new land purchasing and also the facility build-up.

Yeah. Great. Thank you. Thanks, Mark.

Operator (participant)

Thank you so much. Your last question comes from the line of Chris Sengar from Cowen & Company. Chris, your line is now open.

Yeah. Hi. Thanks for the question. 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 it to a wide range of customers, how do you characterize the single-wafer clean intensity between logic, foundry, memory, and also now analog and IGBT customers? Who's the most single-wafer clean intensive and who's the least?

David Wang (CEO)

Yeah. Okay. I think you're looking at last year, our logic versus the memory, and we're almost at half and a half, right? And so that's pretty much equally divided. Even looking this year, I should say we're still, however, roughly close to that half and a half, maybe heavy on the memory a little bit. We see that both opportunities are important, either logic or fab, and also this I call it logic foundry versus memory, right? You know that we have two at this moment, we have three memory houses buy our tool right now.

One is obviously our older SK hynix and YMTC. Also, we have a tool and almost qualified in a CXMT in Hefei. That is our third customer on the memory side. We are continuing exploring other new memory and facility. I am a customer too. Beyond that, in the foundry wise, as I said, we are normal logical devices. Now we are getting analog and also the power device too. That is another market, and we see the growth. We have a capture two customer, and we are probably going to capture another power device customer hopefully beginning next year with another increase for market expansion.

Got it. Thanks, David. For Mark, a two-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 and eval tools can impact op margin?

Mark McKechnie (CFO)

Yeah. I think that's a good question. Yeah, 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. We'd expect to spend into this opportunity. You saw it end up taking 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. Yeah, I think it's the right thing to do at this point in time.

Yeah, I don't think I, yeah, I don't know if David, if you had anything to add. Yeah.

David Wang (CEO)

Actually, I want to say that at this moment, we're really trying to balance between our spending versus profitability, right? We think we're going to heavily invest in R&D and also in their customer or their sales marketing activity. At the same time, we have to keep a certain profitability in that line. I think so far we did very well, and we'll continue to do that balance between the two factors. In other words, we'll also continue to invest heavily. We'll also work on the new product, and hopefully, we can announce next year. That's our effort and put together. Again, try to grow our market opportunity, and also we'll try to catch more customers in China, also outside China.

Mark McKechnie (CFO)

Yeah.

Chris, one thing I did forget to mention, but as our shipments, some of the shipments you won't see showing up in our revenue. That is going to drive a pretty heavy OpEx. You'll get sales commissions and what have you driving our costs on the revenue, but on the demo tools as well, that won't show up in our revenue.

Got it. Got it. That makes sense. Just a final question from my end. With the new Lingang facility, what is the revenue capacity for the company right now?

David Wang (CEO)

Good question. Actually, by our plan, we're building almost about 1 million sq ft of their facility, right? In that, actually about 400,000 sq ft will be for their two identical fabs. With that, we're working on right now, we're thinking about at least 5X more than today's our capacity.

Talking about $1.5 billion revenue is probably the capacity where we're working right now. With more automation, more of a spacing of their efficient using, and that's our goal, 5X of today. $1.5 billion, that's our revenue target.

Got it. Got it. Very impressive. Thanks, David. Thanks, Mark.

Thank you. Thanks, Chris.

Operator (participant)

Thank you so much. Seeing no more questions in the queue, let me turn the call back to David Wang for the closing remarks.

David Wang (CEO)

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 relationship events. Gary, please.

Gary Dvorchak (Managing Director)

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.

If you want to meet with us or attend the presentations, please contact the respective sales representative. On August 13, we will participate in the Needham Virtual Semicab and EDA Conference. On August 27, we will attend the Nomura Virtual China Investor Forum. Also, we will participate in the Jefferies 2020 Virtual Semiconductor IT Hardware and Communication Summit on September 1. On September 9, we will attend Citigroup's 2020 Global Technology Virtual Conference. Finally, on September 11, we will participate at the Credit Suisse Asia Technology Virtual Conference. This concludes the call. Thank you for attending. You may all now disconnect.

Operator (participant)

That does conclude our conference for today. Thank you for participating. You may all now disconnect.