Amtech Systems Inc (ASYS) 2010 Q1 法說會逐字稿

Good afternoon. Welcome to the Amtech Systems first quarter fiscal 2010 conference call. (Operator Instructions). This conference is being recorded today, Tuesday, February 9th of 2010. I would now like to turn the conference over to Mr. Jim Byers of MKR Group. Please go ahead, sir.

Hello, everyone, and thank you for joining us this afternoon for Amtech Systems first quarter conference call. On the call today are J.S. Whang, Amtech's President and Chief Executive Officer, and Brad Anderson, Amtech's Chief Financial Officer. After the close of market trading today, Amtech released its first quarter fiscal 2010 financial results. The release will be posted on our website at www.AmtechSystems.com. In addition, a phone replay of today's call will be available beginning approximately two hours after the call's conclusion and remaining in effect for one week. The call replay information is included in the earnings press release.

Before we begin, let me note that during today's call management will make forward-looking statements. All such forward-looking statements are based on information available to Amtech as of this date, and they assume no obligation to update any such forward-looking statements.

These statements are not guarantees of future performance and actual results could differ materially from current expectations. Among the important factors which could cause actual results to differ materially from those in the forward-looking statements are changes in the technologies used by Amtech's customers and competitors, change and volatility in the demand for diffusion, PECVD and PSG removal equipment, success of our key technology vendors in delivering new products and confirming their technological advantage, the effect of changing world-wide political and economic conditions on government-funded solar initiatives, capital expenditures, production levels including those in Europe and Asia, the effect of overall market conditions, including the equity and credit markets and market acceptance risks, and other factors detailed in the Company's Securities and Exchange Commission filings, including its Forms 10-K and Forms 10-Q. With that said, I will now turn the call over to J.S. Whang.

Thanks, Jim. Good afternoon, everyone. Thank you very much for joining us today. Our CFO, Brad, will review our financial results in a moment but first I will review some highlights of our Q1 and update you on recent business developments.

We saw tremendous order momentum for our solar diffusion systems during the quarter and our total backlog at the end of the quarter was more than $74 million which includes $5 million from our semi sector. These new orders include both significant follow-on orders from our existing customers and orders from new customers. We gained six new customer wins so far this fiscal year further expanding our large and growing solar customer base.

The high level of orders we have received fiscal year to date reflect the increasing number of tier one solar cell manufacturers that are recognizing the high quality and reliability of our diffusion technology and more importantly, our capability to support their pursuit for higher efficiency solar cells. Through our market leading diffusion systems, we have been able to develop a significant presence in the growing solar manufacturing market in Asia within a relatively short period of time. We believe the intense effort by our customers and the industry to increase cell efficiency will continue to drive demand for our superior diffusion technology and related products.

While our substantially increased total orders in Q1 benefited from a very large single solar order which we don't expect to repeat this year, we continue to see excellent quotation activity and an active and promising pipeline of our business. We remain focused on working with our essential partners consisting of top tier solar customers and our strategic business partners to further enhance our solar technologies and leverage our diffusion expertise and leadership in the marketplace.

We also continue to work very hard on our multi product solar growth strategy which includes our new PSG and PECVD products. While we expect to generate increasing customer interest in these products this year, it takes time for new product to gain market acceptance and we don't expect to see meaningful contribution to our revenue or bookings from these new products in the current fiscal year.

Turning to our semiconductor segment, we continue to expect to see improvement in 2010 over 2009. While our book to bill on the semi side was 1.1:1, we do not anticipate seeing a rebound in our semi business similar to the higher end of the market.

To conclude, we are very pleased with the substantial increase in orders we generate from our growing solar customer base and an increasing number of new customers. As we continue to successfully execute our solar growth strategy, which consists of organic growth fueled by the constant advancement of our superior diffusion technology and inorganic growth fueled by technology and/or business acquisition. We remain confident in the long term growth opportunities in the solar market for our existing and the future new products. I will now turn the call over to Brad to discuss our financial results. Thank you. Brad?

Thank you, J.S. I'll review some of the financial results for the first quarter of fiscal 2010 and also discuss our outlook for the remainder of the year. As J.S. mentioned earlier, we had a record quarter in terms of orders, booking almost $60 million including $55 million in solar orders. That coupled with the announced orders so far in this quarter of $19 million clearly demonstrate our market leadership in solar diffusion.

First quarter net revenue was $15.5 million, or up 32% sequentially with solar revenue of $11.9 million compared to $8.9 million in solar revenue in the fourth quarter of fiscal 2009. This was driven by higher solar shipments and higher levels of deferred revenue recognized in the quarter. As a result, our book to bill was an unprecedented 4.2 with solar at 5.3.

We entered the March quarter with a backlog of over $74 million, an increase of 130% from backlog of $32 million at September 30th. Total backlog includes $70 million in solar orders at quarter-end. Just as a reminder, our backlog includes deferred revenue and customer orders that are expected to ship within the next 12 months.

Our first quarter gross margin was 30% compared to 26% in the preceding quarter and 34% in the first quarter a year ago. The sequential increase in gross margin primarily reflects higher shipment volumes and higher margin product mix.

Our SG&A expenses in the first quarter were $4 million or 26% of revenue, compared to $3.4 million or 30% of revenue in the fourth quarter of last fiscal year. The increase was due primarily to higher sales commission on higher revenues and an increase in noncash stock option expense.

Depreciation and amortization in the first quarter was $424,000 compared to $363,000 in the prior year first quarter. Included in the first quarter fiscal 2010 results is $377,000 of stock option expense, compared to $166,000 in the first quarter a year ago. So when you look at EBITDA, it was positive about half a million dollars for the quarter And if you include the noncash stock option expense of $377,000, that results in almost $900,000 positive.

Working down the income statement, our income taxes in the first quarter were $50,000 reflecting an effective tax rate of approximately 38%. Net income for the first quarter of fiscal 2010 was $80,000 or $0.01 per diluted share compared to a net loss of $201,000 or $0.02 per share in the preceding quarter.

Total revenue by geographic distribution for the first quarter was in Asia Pacific region 69%, North America at 10%, and Europe at 21%. We continue to maintain a solid financial position with essentially no debt and a strong cash balance and we increased our cash balance by $177,000 from the preceding quarter. At December 31, 2009, our cash balance was $42.5 million compared to $42.3 million at September 30, 2009, and we had working capital of $56 million and a current ratio of 4.2.

Now, turning to our outlook, as a result of the recent surge in orders from our solar business, we anticipate revenues in fiscal 2010 to be in the range of $100 million to $105 million, an 88% to 98% or almost 100% increase from fiscal 2009 with the bulk of the increase occurring in the third and fourth quarters of fiscal 2010.

We are making a substantial investment in labor, research and development, and facility to support the tremendous increase in growth. These investments will have a short term negative impact on our operating results in the second quarter. As a result we anticipate fiscal 2010 second quarter revenues to be in the range of $17 to $19 million with an operating margin of breakeven to slightly negative due to the build up of production capacity. We should in fiscal quarter, third quarter and fiscal fourth quarter of this year, however, see positive leverage from our business model. Operating results for future periods could be impacted by the timing of system shipments, the net impact of revenue deferred on those shipments, and recognition of revenue based on customer acceptances, all of which can have a significant effect on operating results.

A substantial portion of our revenues are denominated in Euros. The revenue outlook we have provided is based on an assumed exchange rate between the United States dollar and the Euro. The significant decrease in the value of the Euro in relation to the US dollar could cause actual revenues to be lower than anticipated. The composition of our revenues denominated in Euros is really nothing new, but with the recent weakening of the Euro, we felt it prudent to add this additional language. What we're really talking about here is just an inflation or deflation of the P&L, not necessarily affecting margin.

So to recap, our substantial increase in orders reflects increasing market recognition and adoption of our market leading solar diffusion technology. We continue to see a strong business pipeline driven by intense effort within the solar industry to increase cell efficiency and continue to maintain a strong cash position to support our growth plans. And we are optimistic that in these upcoming quarters, third and fourth quarter, we will see leverage from a positive earnings standpoint as we continue our growth plan.

This concludes the prepared remarks section of our conference call. Operator, please open the call to questions.

(Operator Instructions). Gordon Johnson, Hapoalim Securities

Gentlemen, thanks for taking my call and congratulations on the orders in this fiscal quarter. Just a couple of questions. With respect to the OpEx, and excuse my voice, I'm just a little sick, but with respect to the OpEx, can you guys help us understand in the fiscal first quarter how much of that was noncash stock based comp and what the EPS would have been excluding that? And then just a follow up on the OpEx and a couple of more questions.

Sure. The amount that related to the stock comp expense was call it about $350,000 that was stock comp expense, $377,000. And we don't give EPS but you can do the calculation. And actually, one thing to point out there, Gordon, is we did have essentially what I'll call a one time bump up in that stock comp expense for some performance based options and some acceleration of options that occurred related to people meeting certain milestones from options that were issued earlier. On a more ongoing rate, they'll probably be back down to about $180,000 a quarter for stock option expense.

So excluding that $377,000, it looks like EPS would have been closer to $0.05 versus $0.01?

Yes I think that's how you go through that calculation, sure.

So a non-GAAP number is closer to $0.05, okay. And then it looks like you guys are guiding OpEx to be higher in the second quarter. How should one think about that trending through the remainder of the fiscal year? Is it going to be up from that level or should we consider it trending down? How should one consider that trending?

We're accelerating as we speak within this quarter the increase related to primarily labor and some additional facilities, just to have extra room for inventory, for staging to really prepare for it. But if you do the math, compare the annual guidance we gave minus our actual results in Q1 and what we are guiding for Q2, Q3 and Q4 are going to be tremendous revenue quarters for us. So the trend will continue through those quarters but probably not at the same pace.

Okay, so we'll see a slight uptick but not anywhere near the level that we're seeing Q1 to Q2, fiscal Q1 and fiscal Q2?

Right, Gordon, J.S. here. And as a percentage of revenue, that should decrease quite a bit.

Oh so it's going to -- okay. So --

Q3, Q4.

Okay, excellent. Then when we look at visibility in the March and June quarters, you guys had some pretty significant order announcements in the fiscal first quarter. Are there any more big orders out there? Any more new customers? And is anybody looking at using, I guess outside of China, I think that exclusivity period ends in April, is any of the Taiwanese cell companies thinking about using your [N-Type] diffusion furnaces? And again, are there any big orders out there still or any new customers ?

So as to particularly for N-Type and we don't do active marketing at the moment because we have a time triggering mechanism which is April 1st based on the agreement we have with our participating parties on the collaboration agreement. So until April 1st, we will be on a somewhat informal basis, low key, some inquiry. So N-Type is a bit premature. And as to the P-Type business, it's very encouraging and continues to be very active. Our marketing pipeline is very healthy. Like I said, it's a very promising pipeline we have at hand. And outside of China, we see some participation from bigger names in Taiwan UMC, the big semiconductor TSMC. And coming into Korea, the Samsung and LG, they both are entering into production mode. So I continue to see that longer term there are very good opportunities ahead of us.

Okay, J.S., that was extremely helpful. And I understand you guys aren't actively marketing, but this N-Type technology seems pretty promising Have you been approached by any of the Taiwanese guys or can you guys disclose that?

On occasion we do have inquiry from broad based customers showing interest in N-Type, but we will wait until April before we start being aggressive on that. As you say, the N-Type in general has a good future. It comes with many benefits such as it doesn't really impose a light induced degradation like a P-Type. Generally the process brings higher efficiency. So I think we will have to work hard, but we're having fun with the N-Type in coming years.

Just two last questions for me. Your gross margin showed some pretty significant improvement this quarter. Was that due mainly to an increase in utilization rates? Can you tell us where the utilization rates are now and kind of is there any incremental improvement we'll see there? And then lastly, I guess a question probably a lot of people have on their mind, do you think any of your customers are potentially having doubts due to these recent revelations with respect to the German feed-in tariff cuts? Thanks, guys, and congratulations on the orders.

So while Brad is getting ready for the first two questions you have, I'll take on the latter ones. Of course the German FIT gives us some concern or pause, a small hiccup. What I see in the marketplace is also with new entrants and existing customers, their investment plan is not based on near term goal they have. It is a much longer term roadmap they have. So as long as they believe that they have a lower manufacturing cost with a higher efficiency rate they can provide to end users, I believe investment is going to continue to drive solar growth for years to come. Brad?

Yes, thank you. In regards to margin, especially gross margin, it was nice to see the pick up in the quarter. And that was primarily driven by higher utilization really prior to the substantial increase in labor that is occurring in this quarter. So we benefited from kind of a carryover from a more leaner cost structure into the quarter with higher shipments. So that was the driver. And we'll see some negative impact of that in Q2 but then we'll definitely see some leverage into Q3 and Q4, positive leverage.

Okay, Brad, just one more. So it seems like in Q2 we could essentially see EPS negative, is that a possibility?

That's a possibility. Our guidance was that operating margins would be breakeven to slightly negative and unfortunately we're not earning much if anything on our cash balances at the time so other income is going to be pretty negligible.

Okay.

So one more thing, Gordon, as we mentioned in our press release, as we speak we are in rapid process of at least doubling, at least doubling, our production capacity. So all those costs are going to be frontend loaded in Q2, this quarter. And then the productivity from this ramp up will show up in Q3 and Q4.

Right. Excellent. Thank you, gentlemen.

Colin Rusch, ThinkEquity.

Good afternoon, gentlemen, and congratulations on weathering the storm well and coming out on the other end looking good. Can you talk a little bit about the semiconductor business, the replacement business there and if you're starting to see any sort of meaningful uptick in the balance of the year in that business?

Hi, Colin. The semi, as we said earlier, and if we look at the book to bill ratio, it's better than 1:1. And it has been improving steadily for the recent months. So we continue to see that trend sustaining. So semi side, as it continually improves, we will see a better result from that. But compared to solar, it's a much obviously slower pace.

Right, and do you think you can get back to the kind of $30 million run rate that you previously had on the semiconductor business sometime in the next couple of years?

Well we don't have -- right now we see some increase in the parts and retrofits and so on based on higher facility utilization rate. But as to actual capital investment for analog, etc., we don't have a clear visibility on that. But they are improving the market overall, semi market conditions will definitely continue to give us that hope.

Fantastic. Then can we turn back to the solar business. Are you starting to see any retrofit business for existing lines that are trying to update their technology or seeing domestic Asian suppliers with equipment that's basically wearing out at this point?

As we said earlier, all of our solar business establishment has been relatively a short period of time for the past three years. An so our equipment being highly reliable and we really don't trigger the replacement business yet.

But are you replacing anybody else's tools like [Institute 48]? And as some of the tools that I guess some of the other OEMs see as more disposable and they run them in a little bit more aggressive manner?

That's actual replacement in the existing factory, the production line, is easier said than done because our footprints are different. So they have to really juggle with a lot of things before they can think about replacing the equipment itself. And so I think our future expansions and particularly maybe 2011 or next two, three years, when we bring our N-Type portfolio into our activities, and then existing P-Type can be possibly retrofit into or produce N-Type solar cells. That outlook is out there but that will not be current or not much next year either.

Perfect. And then can you talk about any incremental improvements you're making with (inaudible) consistencies with your furnaces going forward? Are there any kind of incremental tweaks that you're making to the tool and what kind of results are they having for your customers in terms of cell efficiencies?

So I say each time we have this call that we, are equipment and process provider for solar industry, and equipment has to have a constant investment of process technology or technology itself. So our effort is very intense. Partnering with the tier one customers and also business partners, credible ones, and trying to not only pace what the customers needs are today, but ahead of our customers needs, and that's our effort is being done.

Great. And then a final question on the PSG tool, can you talk a little bit about the traction that you're seeing now and when we might see that tool set hit the P&L?

We mentioned that we don't expect meaningful contribution from those two new products. However, we continue seeing the interest from our customer base. When it comes to actual placement of an order, as evidenced by our diffusion order bookings, the solar industry itself is in very new and still infant stage. And so when it comes to selecting the equipment, they first of all prefer the best technology and the proven technology, proven providers. And so that's why we are getting more diffusion business preferred by existing customers and also new entrants and customers. So the PSG and also PECVD, I think the same thing is playing out and they prefer not only best technology, but proven track record. And much similar to how much we are getting this diffusion business as we are number one in diffusions.

Fantastic. Thanks a lot, guys.

Edwin Mok, Needham & Co.

Hi, thanks for taking my question. I was just wondering if you can help us in terms of your booking. In what regions are those bookings come from, which country and (inaudible)?

It's predominantly from Asia and particularly China and Taiwan. And we see recently, as I mentioned earlier, new entrants, some big names entering into solar from outside of China and Taiwan such as Korea and India. So right now it's mostly from China and Taiwan.

That's great, and like you said, you mentioned some of the new entrants and investments in the push in that area. I was wondering, are you guys seeing any activity in the Korean region? Any (inaudible) would be helpful.

So, Brad, I didn't hear the question. Did you hear the question, Brad?

Yes, I think -- Edwin, correct me if I'm wrong, you're asking if we're seeing activity in Korea?

Yes, that's correct, thank you. Sorry about that.

Right. As I mentioned earlier, in fact there was a solar trade show and conference last week in Korea and it really impressed me. And we've been waiting for quite some time when the Korean big names are going to get serious about the solar. But they show quite a bit of activities and coming out of a pilot line, they are planning rather impressive production stage. And so I was very encouraged about that activity. And those names, particularly those names are Samsung and LG, and a few other local companies in Korea.

Great That was helpful. Brad, just one question for you. On the gross margin side, I may have missed it, have you, did you quantify how much the increase in fixed costs would have impact on your gross margin in the coming quarter with this ramp? And also, as you look a few quarters out, as you start to ramp, any way you can quantify for us how the incremental margin, gross margin you can generate from these (inaudible)?

Sure, just to -- we did not give any specific guidance as to the gross margin in this next, this March quarter, but that operating margins overall would be affected and coincidentally would also be affecting the gross margin. It will be down from where it was, but we haven't quantified that. Going forward though, I think a way to look at Q3 and Q4, a good proxy of that is to look back at 2008 in our June and September quarter where we had a similar ramp up, not as great as this will be, but similar. And you can see that we were able to post gross margins that were in the low 30s, 30+%. And our expectation would be that we ought to be able to get back into those types of numbers.

Great. And then lastly on these new products that you talked about, any difference in marketing profile for these products versus what you sell now?

Well the new products really are not going to have much impact because of whether from bookings or from revenues in fiscal 2010. And 2011 we'll have to see what happens there, but the gross margin profile will be somewhat lower because these are licensed products. We've basically outsourced the manufacturing. But they should have a positive impact as we start getting up into volumes of them through the operating margin. But that's still a ways out.

Of course. Great. Thanks for answering my questions.

Andre Garner, [Articles] Management.

Thanks. I also had a question on the gross margins and wondering what you could do to increase those. Also wondering whether or not there's room to raise your prices in light of all these recent orders?

As far as the improvements to gross margin, we're always looking at incremental improvements. I think with that ramp up that's occurring, we feel like we're at the end of that bullwhip. We went through 2009, did an excellent job managing the business and being EBITDA positive excluding the noncash impairment charge And then we had to come back and ramp up quickly as the orders flooded in. So we'll be -- we will be efficient, we just won't be as efficient as a more gradual ramp up would have been.

Having said that, with the ramp up we've been able to selectively get some discounts on the material costs so we'll see some benefits there We also continue to look at improvements in how we manufacture the product, to improve efficiencies from a labor standpoint, made a little bit of reduction in material costs. We continue to look at all those things to where if we pick up 100 or 200 basis points here or there and we're able to do that, I think as we get into the third quarter and fourth quarter you'll see that, especially in the fourth quarter, even more so.

Okay. Thanks.

Andrew Kaplan, Harvest Capital.

Thank you. Hey, Brad and J.S., how are you? I guess I want to play a little bit of a hypothetical game. I hope it's not too difficult. I'm just doing arithmetic on what you've guided for the year and at the mid point of your guidance, it sounds like your revenue for the second half of the fiscal year comes in at just close to $70 million. I know you eluded to that. And I guess my question is, if you expect to get the gross margin into kind of the low 30s, similar to what you did in the last up cycle, my question is around the operating margin leverage. In order to get yourself to kind of a 15% operating margin for the second half, you would need to come in at an operating expense rate of about $6 million per quarter. The way I'm modeling, I guess what I'm really trying to ask is, is $6 million a quarter a reasonable rate? Or given the high commissions you're gong to be paying, is it going to go quite a bit higher than that? Or how should we kind of think about modeling operating leverage?

Yes, the operating margin, I think when you look at Q3, will definitely be a substantial improvement to where we've been. I don't think we will see the full effect of that until Q4 because we'll still have some ramp up going on there and getting the full effect of efficiency we will see a big increase in Q3 but really see the full effect of that more in the Q4.

I get that and I wasn't trying to single out a quarter, I was just -- I guess let me ask it a different way. If I'm doing the math right, your operating expenses for the March quarter will increase about a million dollars from the December quarter and that gets you to kind of a slight operating margin loss assuming gross margins are flat or down a little bit from the current quarter. I guess maybe to follow on Gordon's question, is that the bulk of the increase or I guess should we expect the increase in the quarters beyond March to be another million dollars or less than a million per quarter? Or how would you kind of help us make sense of how much restructure you have to add on to kind of make sure you're ready for this ramp that's coming?

Yes, I think there will be somewhat a smaller increase in infrastructure. It's more the commission. If you look at that and you said $70 million in the second half, and you divide that say in half, so you're looking at $35 million quarters. You are going to see a ramp up on the commission side so the selling in our SG&A will continue to ramp up. The rest of the costs will have some increase but not as significant.

I forget, you roughly guided in the past your commission rates in the range of was it 6% or I forget?

Yes, probably, it's been in that range.

Okay, so think of the incremental increase in OpEx, after you guys get done with the fixed cost increase, as being some percentage of the increase in revenue? Other than that you guys should be hopefully flat on expenses? Is that fair?

Yes, expenses are never flat on such a ramp up, but the rate of increase obviously will be lower.

Okay, great. I guess the other thing I wanted to ask is at this point your visibility is extending out through longer than it has in the past. Your delivery time is longer. Can you now see your way to -- do you have some idea of the December quarter of 2010 or even March 2011? How far can you see in this current cycle where you guys are still going to be putting up going strong numbers in the solar business?

The visibility right now, because of the backlog obviously will be shifting quite a bit in Q3 and Q4. We still feel pretty good about the first quarter, call it the December quarter, 2010, so first quarter 2011. And we're still, as J.S. mentioned, this market is still an infant market, so we kind of have to continue to watch that. We think ultimately that the N-Type opportunity will kick in and hopefully that will propel us as we go into 2011.

Obviously this was an extraordinary order quarter because of the very large single order from one customer, but if you look at kind of the average of the last two quarters, we see your average kind of in the mid/high 30s of orders per quarter. Do you think that represents the peak of the cycle or do you think possibly you could exceed that average over a couple of quarters?

I think we need to remember that this business always, being a capital equipment business, as you know, can be lumpy at time. So trying to do any kind of linear analysis on it is difficult. What I can tell you is reiterate what J.S. said earlier, what we said in our press release, is the pipeline still looks active, we see some good opportunities there, and we continue to feel optimistic about the future Whether we can maintain that level or not is something we really aren't ready to comment on. I think we look at we did $19 million so far that we've announced in this quarter and feel good about what we see down the future to maintain our position as the leading diffusion market leader.

I want to add to that, if you just exclude the one large order and look at the rest of it, and based on -- the comparison based on what we already booked and what is in the marketing pipelines, what's in the marketing pipelines, all those activities looks as good or better than what we already booked. And so that's where our optimism is coming from.

Okay. Great. Thank you very much and congratulations.

Gordon Johnson.

Thank you. My question has been answered.

Thank you, and I'm showing no further questions in the queue. I'll turn it back over to management for any closing comments.

Well we appreciate everyone joining us today. We think these are exciting times for Amtech and look forward to reporting to you on our progress and really appreciate your continued interest in Amtech. This concludes today's call.

Thank you. Ladies and gentlemen, that concludes today's conference call. Thank you for your participation and for using ACT Conferencing. You may now disconnect.