Amtech Systems Inc (ASYS) 2012 Q3 法說會逐字稿

Good afternoon and welcome to the Amtech Systems fiscal 2012 third quarter results conference call. (Operator Instructions) I would now like to turn the conference over to Brad Anderson, Chief Financial Officer; please go ahead.

Thank you, Ami. Good afternoon and thank you for joining us for Amtech Systems third quarter fiscal 2012 results conference call. On the call today are J.S. Whang, Amtech's Executive Chairman; Fokko Pentinga, our President and Chief Executive Officer; and myself, Brad Anderson, Chief Financial Officer.

After the close of trading today, Amtech released its financial results for the quarter ending June 30, 2012. The release will be posted on the Company's website at amtechsystems.com. During today's call, management will make forward-looking statements. All such forward-looking statements are based on information available to us, as of this date and we 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 our customers and competitors, change in volatility in the demand for our products, the effect of changing worldwide 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. Other risk factors are detailed in the Company's Securities and Exchange Commission filings, including its Form 10-K and Form 10-Q.

J.S. Whang, our Executive Chairman, will start our discussion today. Fokko Pentinga, our President and Chief Executive Officer, will update you on current operations and discuss the progress in our technology and product development road map. I will then discuss third quarter financial results and our outlook for the September quarter.

So I will now turn the call over to J.S. Whang, our Executive Chairman, to begin the discussion.

Thank you, Brad. Good afternoon, everyone, and thank you for joining us. We appreciate your continued interest in Amtech Systems. Let me first say that although this remains a very challenging environment, we continue to execute the strategy of providing our customers with an increasing number of products and technologies to support the next-generation higher cell efficiencies. Our CEO, Fokko, will update you those products and technologies today.

With the solar industry's overcapacity, reduced service fees and demand in Europe, most customers' focus is on managing the balance sheet and operating cost issues. However, we believe once customers complete these necessary tasks, the next available avenue for them to further reduce the cost over their product is through cost-effective, next-generation, higher cell efficiency technologies and we are looking forward to beginning of that technology buying cycle.

It is very clear that solar is now becoming an integral part of our global energy mix and solar as a part of that mix is growing. Year over year, solar installations are increasing in many regions of the world. This will fuel future solar growth and the continued need for advancing the solar technologies. We are intensely focused on that longer-term opportunity.

Let me now update on comments we have shared previously regarding our efforts on external growth opportunities. While we were able to make significant progress on our goal of diversifying the revenue mix, at this time, our Board and management concluded it is more prudent to focus on internal innovations. Therefore, we agreed to temporarily postpone moving forward on this opportunity.

We continue to address all opportunities to manage cash during this stage of [both] the downcycle. As a part of Amtech's recent overall cost reduction program, our senior officers have taken voluntary salary reductions and in addition to that, we have reduced Board fees and other corporate salaries for Board, senior officers, and our entire organizations are united with a common focus on Amtech's long-term goals.

Before I turn the discussion over to Fokko, we appreciate your continued interest in Amtech and assure you that we remain committed to our longer-term objectives. We are 100% focused on maintaining our market leadership position, delivering new products into the marketplace, preserving cash, diversifying our revenue mix over the longer term, and delivering value to all key stakeholders in the near and longer term.

And now, I will turn the call over to Fokko Pentinga, our President and CEO, who will discuss current operations and our technologies under developments. Fokko?

Thank you, JS. We continued to work very closely with our customers during this quarter as well in regards to obtaining customer acceptances. Given the current headwinds for all solar industry participants, this quarter's level of acceptances on tools clearly reflect not only developments of Amtech's technology, but the diligence of our sales, service, and technology support teams and the quality of our customers.

Despite the current headwinds, Amtech remains very well positioned to consistently deliver on its long legacy of providing high-value products and services to the market. We continue to collaborate with our customers in a joint pursuit of advanced technologies essential to meeting the longer-term demands for the solar solutions. Such collaborations, collaborative partnerships are strengths of our business model and have driven our success over time.

In May, our solar subsidiaries, Tempress Systems and Kingstone Semiconductor, exhibited at the SNEC 6th International Solar Industry and Photovoltaic Exhibition and Conferences in Shanghai. The SNEC Exhibition is the largest solar exposition within the industry. At the show, we unveiled our ion implant system and our new tube-type batch PECVD product. We saw much enthusiasm for these technologies and we engaged in conversations with current and prospective customers.

Our solar subsidiaries have and will focus our resources on the development of our next-generation technologies and on ensuring we maintain the highest level of customer service. We continue to invest in R&D in what we believe will be transformational and potential disruptive technologies. We are confident that our new products will be recognized as high-value solutions in the market's unending pursuit of high-efficiency solar cell production at a lower cost of ownership.

And let me now review our newest technologies. First is solar implant technology. Our ion implant system developed from ground-up by our China subsidiary, Kingstone Semiconductor, is designed to deliver to specific needs in the solar industry. It provides our customers with more complete solution for the next-generation high-efficiency solar cell production and as an upgrade to their existing solar cell manufacturing lines. We have been processing wafers for a selected number of customers and results continue to look very promising.

On PECVD, in regards to our new PECVD product, our subsidiary, Tempress Systems, has capitalized on our extensive expertise with the diffusion batch processing and PECVD development. We are excited about its product and it doubles the size of the solar market Tempress serves. However, due to the current headwinds in the solar industry, placement of our first systems will take some time.

On N-type, together with our technology partner, ECN, and also Yingli, the development of N-type technology is continuing for future high-efficiency cells; the offering today is at 19.5% efficiency and we have a road map for efficiencies to 20% and more.

Now, on the market situation, at this time, I will conclude my comments, again noting that the market's visibility is limited and we remain cautious about forward demand. We continue to align cost with the current sales and operating environment, while we maintain our ability to be highly responsive to any change in demand. We are excited about our new technologies and although timing of future over this is uncertain, we can say with confidence that there is a real interest in the marketplace.

I will now turn the call over to Brad to discuss the quarter's financial results. Brad?

Thank you, Fokko. Let's review our third quarter results. Net revenue for the third quarter of fiscal 2012 was $24.3 million, up 13% sequentially from $21.6 million for the preceding quarter, and down 66% from $71.9 million for the third quarter of fiscal 2011. The sequential improvement was driven primarily by higher revenue recognition of acceptances received from customers in the solar industry.

Semiconductor revenue totaled $9.1 million, down 17% from the second quarter of fiscal 2012 and 19% lower than the third quarter of fiscal 2011. Total orders in the third quarter of fiscal 2012 were $6.1 million, $700,000 of which was solar, down from total orders of $18 million in the second quarter, that quarter which benefited from selective capacity expansions by both solar and semiconductor customers.

At June 30, 2012, the Company's total order backlog was $35.6 million compared to total backlog of $67.4 million at March 31, 2012. Total backlog at June 30 includes solar backlog of $26.1 million compared to solar backlog of $54.1 million at March 31. Foreign exchange caused a $3.2 million reduction in backlog in the June quarter. Backlog includes deferred revenue and customer orders that are expected to ship within the next 12 months. While there were no significant order cancellations in the quarter, the reduction in backlog during the third fiscal quarter reflects our estimate as certain customer orders will not be delivered within the next 12 months.

Gross margin in the third quarter of fiscal 2012 was 20% compared to 19% sequentially and 36% in the third quarter of fiscal 2011. The slightly higher gross margin compared to the second quarter 2012 reflects higher revenues, partially offset by an increase in inventory write-downs, accruals for purchase order cancellations, and higher warranty-related costs. Those reserves totaled $3.7 million in the quarter.

Our SG&A expenses in the June quarter were $6.4 million compared to the preceding quarter of $6 million. The increase was primarily due to higher marketing and sale expenses associated with key solar trade shows. SG&A expenses in the third quarter of fiscal 2011 were $12 million.

Research and development expense was $3.7 million in the third quarter of fiscal 2012 compared to $3.3 million in the preceding quarter and $1.9 million in the third quarter of fiscal 2011. The year-over-year quarterly change is primarily due to investments in the Company's solar ion implant project and development cost associated with other solar product and technology development programs.

Depreciation and amortization in the third quarter of fiscal 2012 were $727,000 compared to $760,000 in the second quarter of fiscal 2012. Included in the third quarter of fiscal 2012 results is $438,000 of stock option expense compared to $356,000 in the fiscal third quarter a year ago, and $437,000 in the second quarter of fiscal 2012.

The income tax benefit in the third quarter of fiscal 2012 was $1.1 million, resulting in an effective tax rate of approximately 21%.

The net loss for the third quarter of fiscal 2012 was $3 million or a loss of $0.31 per share, compared to a net loss of $5.1 million or $0.54 per share in the preceding quarter. The lower loss was primarily due to higher revenue associated with customer acceptances, partially offset by increased investment in research and development. Net income for the third quarter of fiscal 2011 was $7.3 million or $0.74 per share.

Total revenue by geographic region for the fiscal third quarter was the Asia-Pacific region at 73%, Europe at 17%, and North America at 10%. We continue to maintain a solid financial position, with essentially no debt and total cash and cash equivalents of $42.3 million, compared to $48.8 million at March 31 and $54.9 million at December 31. The decrease in cash is primarily due to continued investment in new technologies, including our solar ion implanter and operating losses.

Further cost reductions are being implemented in this quarter, including salary reductions of senior officers, the Board, and corporate employees, and are expected to result in cost savings of $6 million to $7 million in fiscal 2013 when compared to an annual run rate of the first half of fiscal 2012.

At June 30, 2012, we had working capital of approximately $80.3 million. We continue to manage our operations to maintain our solid financial position. We are focused on reducing our purchase commitments and managing inventory to an appropriate level. Over the course of these first nine months of fiscal 2012, we have reduced our purchase commitments by approximately $30 million.

Now, let me turn to our outlook. The supply-demand imbalance for solar cells and modules continues to negatively impact the entire solar supply chain and some orders have been pushed out to fiscal year 2013. As a result, the Company expects revenues in its fiscal 2012 fourth quarter ending September 30 to be in the range of $15 million to $17 million. Gross margin percentage is expected to be similar to the June quarter. Total SG&A and R&D expenses are expected to be lower, and the Company expects to incur a net loss in the fourth quarter.

As a reminder, our operating results could be impacted by the timing of system shipments, the net impact of revenue deferral on those shipments, and the recognition of revenue based on customer acceptances, all of which have in the past and can in the future have a significant effect on operating results. In addition, a substantial portion of our revenues is denominated in euros; the revenue outlook we've provided is based on an assumed exchange rate between the United States dollar and the euro. A significant decrease in the value of the euro in relation to the US dollar could cause our revenues to be lower than anticipated.

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

(Operator Instructions) Colin Rusch, ThinkEquity.

Good afternoon, gentlemen. Can you talk about what's the right level to think about for R&D spending on an ongoing basis into next year?

Colin, this is Brad. Obviously, the level of R&D spending this year so far to date has been higher than we've been historically, and that's been driven by our ion implant development. We've made good progress there, talked about the build of a beta tool [to kind of] depending on when we need to build further tools will have an effect on the timing of how much gets charged to our R&D. So we expect it to be lower, to trend lower than in the past two quarters.

Okay and great. And can you talk about what the key triggers are for your clients to start pushing orders again? Are they needing to return to generating positive operating cash flow or are they just looking at ROI on their systems for existing business or are they concerned at this point about product development from competitors and then keeping up with efficiency metrics or they are same from competitors?

Fokko here and also here, there is not just one answer, and there are some tier-one customers, which I think will start doing further investment based on what they -- the place they want to be in the next few years. So the exact trigger of changing to profitable again may not be the only trigger. And besides that, there are quite a few customers, particularly in China, and there are government owned and they have their own plans. So, there is not one answer to that.

If you would say average market, they want to see real and stabilizing of the market and an improvement, but I don't think that that category of -- that group is -- it will be a bit more unpredictable because it's not so easy to see when that exactly is going to be, but I'm convinced that the other groups that I mentioned will start investments again next year in order to keep their position in the market or just to make sure that they have sufficient supply and get a better position and a ranking of solar cell manufacturers.

And given the tariff kind of back and forth between the EU and China, and the US and China, are you seeing any new geographies trying to emerge as potential opportunities for Amtech?

I don't see that really happening yet so far. That would mean that a new manufacturing facility should be built in Europe and are looking at a potential tariff in Europe and in the US. And I don't see that happening yet. Could that be in start next year, possibly, but for now, I think they find sufficient alternatives either through other places in Asia to get a supply of cells. So I hope it will happen, but other than things that have already been published with -- where companies will start productions here in the US, but that has not directly anything to do with the tariffs, it may help a little bit, but I don't see that happening right now.

Perfect, thanks a lot, guys. I'll hop back into queue.

Jeff Osborne, Stifel Nicolaus.

Great, thank you. Brad, I'm not that familiar with Dutch labor laws, can you just walk me through what the restructuring charges will be in the next two quarters and what portion is cash and non-cash?

Sure. As we issued [a sets of] press release basically concurrently with the earnings call, in that press release, we talked about the cost savings and also that because of the flexible nature of the labor that we brought on, we don't expect to incur any significant restructuring charge. Without going into a lot of details, there is basically several tiers and the highest tiers will just say that you look at from a labor pool or people you've hire through contract agencies. And then, from there, you have people who are what are called temporary contracts and we're still working through that pool and as your contracts expire, you just don't renew the contracts.

Okay. Maybe for Fokko, it sounds like you took a scrubbing of the backlog this quarter with the decline in -- can you just walk us through the process of your interaction with customers and what comfort level you got that actually the orders will be pushed out beyond 12 months?

Yes. We have constant contact with the customers and so at the end of definitely every quarter, we'll double-check and see what they believe is going to be the required shipping date. And in some cases, we also have our own judgments where we think that that may not necessarily actually happen.

So -- and if we believe it is not really going to ship in the next 12 months, then we also deduct it, because cancellations haven't really happened much and customers still believe that most of it, it's shipping in the next 12 months, but we also have to be realistic and have our own judgment on that.

So that's pretty much what I can say about it. And again, maybe things that we take out now, because we don't believe it's going to happen in the next 12 months, as soon as the market changes, it may come in in the backlog again, but we took a reasonable, realistic approach on that one.

Understand. And then, maybe one more for Brad here, on the ion implant beta unit, can you just remind us of the revenue recognition policy? I guess, I was a bit confused. It sounded like you mentioned that you were continuing to sample wafers through that. But then, you also in response to Colin's question talked about R&D going down.

My assumption was that you were going to try to sell that unit that you have and then you'd be forced to build another one. And my understanding was that you couldn't record any revenue on the ion implant tools until you actually sold three of them. So I guess I was expecting R&D to be guided to be up given the continued investments needed there and also the revenue recognition policies that you have?

Sure. I think part of the, I think, solution to that equation is, when we build a beta tool, that build is going into R&D expense. And, yes, there is some ongoing testing that's done that hits R&D, but the big chunk of it is for when we build the tool and it's not [hurting] the inventory. There will be a nice pickup, when we eventually recognize revenue upon a customer acceptance, but we have to have that happen for, I think, two tools.

Two tools, okay. Got you. And then, two other quick ones here. Any impact from the Centrotherm insolvency filing and then just throwing in the second one, any view of potential grey market equipment out there and the impact to buying new tools?

Well, for the Centrotherm insolvency, I think, they're not sure yet what's going to happen to them. So it's also very difficult for us to see what the end result will be. Definitely, customers that have their equipment, are looking at that equipment, are a little bit less confident with them as they were before. So that has an effect, but as there is not much buying going on, the net effect is not so big at the moment. And I think it will be at least a couple of months before large volume orders come around, and by that time, we only have a three-months umbrella of which one is almost done. So I think they will find a way forward, but in a different -- they will be a different company than they were before. And so for us to say what that's going to be, and hard to say for us.

Understand. And then, on the used or grey equipment out there with the options that are taking place?

Yes. So far, I have not seen too many of that happening. So far, not many fabs have really shut down in the way that they don't plan to, at some point in time, to put the lights on again. And yes, I know of one or -- I think one customer that got equipment and he's not going to install them when they are available, but that's a small number. So it's mostly from what I can say, from what I can see, it's not people talking about it, that actually see those being offered on the market for lower prices or I don't see much of that right now. It could change any time, but so far, I haven't really seen it.

Great. Thanks for all the details, Fokko.

You're welcome.

Jay Srivatsa, Chardan Capital Markets.

Yes, thanks for taking my call. In terms of a breakeven, given the cost reductions you're doing, what kind of revenue run rate do you expect you need to get to to achieve breakeven going forward?

Jay, it's Brad. Again, that depends on product mix and the level of customers acceptances in any quarter, because that makes tremendous -- has tremendous impact on our margins. So obviously, it helps to lower that breakeven. But as we get into more outlook for fiscal 2013, [we're going] to share a little more insight to that in our year-end conference call. And we actually see those costs really in place and is starting to generate those savings.

Okay. In terms of your inventories that you're holding, given some of the order pushouts, are you expecting any write-downs in inventories or you expect to be able to sell this through?

Well, in the quarter, we -- every quarter, we do an analysis of our inventory; and in this quarter, we did the same thing and actually looked up a little bit. So we did take a -- well, I consider it to be pretty substantial charge to our inventory and that $3.7 million, a majority of that came from an inventory reserve. So we look at that on an ongoing basis and it will depend on what we see is the outlook at September 30 and to really drive whether there is reserves, but most of the reserves we're booking though are more from a usage standpoint than saying a part is essentially obsolete. So, if the market does recover, it's -- this is useful inventory; it isn't as if they've been obsolete because of a technology change or anything like that.

All right. Last question in terms of a cash position given you're guiding to some losses for next quarter, I guess the question is what's the minimum level of cash do you feel comfortable maintaining as you look ahead to 2013 and how do you hope to be able to keep it at those levels?

On the first part of the question, as a finance guy, we always want as much cash as you can have to, I guess, feel comfortable with. So to answer the second question is the announcement today of this next phase of cost reduction as indicative of how we approach managing through the downturn.

And if we don't see any pickup in the near term from an outlook standpoint, then we will look at our cost structure and there is more room if we need to to reduce cost and manage our cash, that we -- while we have gone down considerably from our cash balance from where we were at September 30, the rate of decrease has slowed significantly and that's -- we continue to work on making that rate decrease even as we move forward in the next several quarters. So we will continue to manage our cost structure and we'll bring that down.

If you look at our cash burn and look at the cash flow forecast -- not cash flow forecast, but the cash flow statement and you look at really what burned through the P&L is -- was much less than the total cash reduction. So most of that cash is still sitting -- that's been used is sitting in working capital and -- versus being burned through the P&L.

All right. Last question for Fokko, in terms of the Centrotherm's bankruptcy, what does it do to the landscape competitively? Assuming things improve at some point in time in the future, does it help your cause in terms of gaining some market share from some of their existing customers or do you expect Centrotherm to continue to be in existence and get back into the game at some point?

It's the last one. I do expect, because it's not a real bankruptcy, it is a restructuring under their own control and it's in -- so I expect that it was a strong company with good products supporting a growing industry. So I would be very surprised if they would not come out of this again in a different form but still continue to be a competitor and what it will change is I think compared to us although of course due to the whole market changing so much [we all strong], but in size comparing I think it will be less big of a difference than it was in the last couple of years, because they will have to do a lot of restructuring in order to become stable again.

So, I think it could help us in our market share, but of course, there is more competitors that will try to get in there as well, but it's -- I don't think it is, at this point, negative for us and so it could create some opportunities. But then, again, we don't know yet how well of a restructuring they are able to do and how they will be after that restructuring. So, we'll have to look and see.

I think they took a good moment to do this, because there is not too many orders to be given today. So besides the umbrella for creditors, there is also not a huge impact on the sales, because there is not too much orders to be getting. So, we'll have to look and see in about two, three months.

Thank you.

(Operator Instructions). Mark Miller, Noble Capital.

Just wanted to go back to the ion implant and how you might start generating revenues, you mentioned that there would have to be two beta-type tools that were out there and basically accepted and then what after that? Are we looking six months, a year? Is this going to go at the pace in the solar industry recover, or is it going to be faster or slower than that?

Well, that's really hard to say, because first of all, the last one I think is correct. It will -- the whole industry has a big effect on that. If the industry would have been like it was two years ago, things would have moved on a lot quicker. So a customer is deciding on actually starting a -- installing a data tool or having a joint development project is different now than it was then. So yes, the whole solar industry will have an influence.

But besides that, we're working on a couple of projects and we are doing wafer sampling for them. So we're still reasonably confident that in the next six months, we will have one or two of those machines installed at customers and then how quick acceptances go, well, that also depends on what you want to achieve, but we're quite confident on that and the machines development has been going well and customer interest is high, but exact timing is a little bit difficult to say.

Just wondering if you've gotten win of any even rumors about China doing anything to help support the solar industry, the government of China or anything coming down the pike in terms of incentives or aid to help that industry, at least in China.

Well, other than the ones that have been published where they have the feed-in tariff and so on, I don't really know of anything else, but we do see that as I said earlier in the call that some of the tier-one customers are -- want to maintain their position in the market and some of the China-owned or state-owned companies still will move forward in their expansion plan. So which way that is financed, I don't know, but it does give me the indication that they definitely will continue to support that industry and probably, as they also mentioned with selected group of companies. They will not do it over to board, but it's selected group of companies and we continue to see that self-confidence in those companies is still quite good. So that's a good sign, I think.

Thank you.

Howard Halpern, Taglich Brothers.

Good afternoon. Brad, I was skimming through the 10-Q filing and I just wanted to make sure I read one part right about, you will be making a $5 million cash payment for taxes in the fourth quarter.

Yes. And I think the disclosure is that will be paid in the second half of calendar 2012.

Okay. I just wanted to make sure I had that right. And then, just in terms of -- I know you discussed it earlier, but I don't know if you could place a natural number on it, but what are you seeing in terms of inquiries from existing customers versus new customers that you have in service before?

Well, the majority remains with customers that we know. But then, again, we do know most of the customers and very large portion of the larger customers are our customers. So saying it's from our existing customers already covers a very large portion of it. And yes, we do get some more interest from people that were not necessarily our customers. And due to the change in -- I also earlier mentioned the other companies having maybe some even more difficulties than [ours,] we do see a slight change in there that there's a bit more interest from those that were not our customers before.

Okay. And with regard to China, could the trigger for increased spending for the solar industry come once the top -- I know they're going through a political changeover and that should be done by the end of the year. Do you think that might be the trigger to -- as to when spending might really get going after that change is made?

Frankly, I don't know. I don't have any indications on that, but then again, I really don't know.

Okay.

So hi, this is what, J.S. Whang. As you are aware, the China National Energy Agency, they came up with our new solar installation plan by 2015 in -- to 21 gigawatt and that is about 6 gigawatt more than they previously announced few months back. And so, if we look at the end of this calendar year, estimated the total installed base will be around 5 gigawatt. And there will be another 15 gigawatt to 16 gigawatt installation over next three years. And so, I think one of those customers, particularly our tier-one customers, [are jacking] the petitions to make sure that they have worked a [chunk of well worth the share] over that and whoever want things that they can really do good share over that 15 gigawatt, 16 gigawatt, well trigger capacity expansions and that well may happen 2013.

Okay. Well, that -- okay, and let's cross our fingers. Thanks, guys.

Okay.

(Operator Instructions). This concludes our question-and-answer session. I'd like to turn the conference back over to management for closing remarks.

Thank you, Amy, and thank you all for your time today and for your interest in Amtech. I will be available for any additional questions you may have and welcome your follow-up calls. This concludes today's call. Thank you.

Thank you for attending today's presentation. You may now disconnect.