Amtech Systems Inc (ASYS) 2012 Q4 法說會逐字稿

Good afternoon, and welcome to the Amtech Systems fourth-quarter and fiscal 2012 conference call. All participants will be in a listen-only mode.

(Operator Instructions)

After today's presentation, there will be an opportunity for you to ask questions.

(Operator Instructions)

Please also note that today's event is being recorded. I would now like to turn the conference call over to Mr. Brad Anderson, Chief Financial Officer. Sir, please go ahead.

Thank you, Jamie. Good afternoon, and thank you for joining us for Amtech Systems' fourth-quarter and fiscal 2012 conference call. On the call today are J.S. Whang, Amtech 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 year ending September 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 our SEC filings, including our forms 10-K and 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 fourth-quarter and full-year financial results. So I will now turn the call over to J.S. Whang, our Executive Chairman, to begin the discussion.

Thank you, Brad. We really appreciate you joining us today as we present our fiscal Q4 and 2012 results. We will discuss current business conditions, our thoughts about next year, and Amtech Systems' opportunities for the longer-term. During these challenging times for solar, our entire organization has remained focused on important ongoing objectives, which include our customers' current and longer-term technology needs, cost management, and the interests of our shareholders. These are our priorities, whether we are operating in a market of cycles, delivering record earnings, or during the tough market down-cycles, such as we are experiencing now. As you are all aware, the solar industry remains under pressure, even the supply/demand imbalance, trade war and [Chinese] concern, and macroeconomic uncertainty. However, for the longer-term, there is a strong worldwide interest in renewable energies, with the solar being a proven, cost-effective source of energy, which will be an important part of the global energy mix going forward.

I want to emphasize that we believe Amtech is a premier provider of technology services to our industry-leading customers. We are well-positioned to build upon what we have accomplished, while managing through the current challenging business environment. Our primary objective is to leverage our strength, continue to invest in technology to fortify our position in the marketplace, fully capitalize on our market leadership position in the next buying cycle, deliver profitable growth and enhanced share value over time. For now, we remain focused on our core technologies and organic opportunities. Over the longer-term, we look to invest in adjacent technologies to further diversity our product and [beginnings] portfolio, expanding the size of the market we serve, and further enhance our value to our shareholders and stakeholders. I will now turn the call over to our CEO, Fokko Pentinga. Fokko?

Thank you, J.S. And I, too, would like to thank you all for joining this call today. As J.S. mentioned, fiscal year 2012 was a tough operating environment, impacting the entire solar value chain. As the market weakened, we aggressively reviewed the total organization and continuously adjusted our cost to best align with the pull-back in demand. Good cost management is our culture during good times and in the more challenging operating environments. As always, the backbone of our Research and Development Group, and Manufacturing and Technical Support teams is strong, and we are confident that we are very well-positioned to service our customers today and respond without issue at the point of a market ramp-up in demand. In fiscal 2012 we made significant progress with respect to advancing our technology through innovation and calibration with partners.

When we introduced our ion implant system and new tube-type batch PECVD in Shanghai this May, we saw a very high level of interest. Based on our ongoing conversations with current and prospective customers, we know interest remains high for these next-cycle solutions. In fact, we have been working on a joint development project with our ion implanter that has allowed us to make significant progress in process development and perform wafer demos for potential key customers. And although capital equipment spending is very limited across the industry to date, what is physical to the industry is that our research and development capabilities are leading edge. And the ongoing collaborations with our industry-leading customers furthers our ability to stay on top of bringing new technologies to the marketplace. I'm very proud of what we accomplished over the last year specific to product development. Importantly, we continue to invest in research and development, including continued development of advanced P- and N-type cell technology and improved efficiency in cost of ownership. Although interest in our new technologies is high, visibility of improved demand is very limited.

At this time, we are expecting 2013 to be another difficult year, with only selective capacity expansions. We will continue to collaborate with our customers, make incremental technology improvements now, and to bring new technology solutions to them as the solar market and capital spending environment improves. We share the same belief as our customers that the next-generation technology solutions are a compelling investment for the future and core to the long-term differentiation and profitable growth. Our relationships with our core customers are strong. We are keeping the conversations going with respect to the next buying cycle and their priorities. We are advancing our technologies today and will continue to do so as we move towards the future time when demand returns to the marketplace. I will now turn the call over to Brad to discuss the quarterly financial results. Brad?

Thank you, Fokko. Let's review our fourth-quarter results. Net revenue for the fourth quarter of fiscal 2012 was $10.9 million, down 55% sequentially from $24.3 million in the preceding quarter, and down 82% from almost $60 million in the fourth quarter of fiscal 2011. The sequential change reflects a continued unfavorable market conditions within the solar industry.

Total customer orders in the fourth quarter of fiscal 2012 were $5.7 million, $2.1 million of which were solar, down from total orders of $6.1 million in the third quarter. At September 30, 2012, our total order backlog was $18.7 million, compared to total backlog of $35.6 million at June 30, 2012. Total backlog at September 30, 2012 includes solar backlog of $13.8 million, compared to solar backlog of $26.1 million at June 30, 2012. Foreign exchange caused an $800,000 increase in backlog in the September quarter. Our backlog includes deferred revenue and customer orders that are expected to ship within the next 12 months. The reduction in backlog during the fourth fiscal quarter reflects our estimate that certain customer orders will not be delivered within the next 12 months. In fiscal 2012, $5.7 million of customer orders were canceled. These orders were not shipped and were not in our June 30, 2012, reported backlog, as they were previously expected to ship beyond 12 months. Gross margin in the fourth quarter of fiscal 2012 was a negative 63%, reflecting $9.2 million of inventory write-downs and losses on firm purchase commitments, compared to a 20% gross margin in the prior quarter, and 34% in the fourth quarter of fiscal 2011. Excluding these charges, our gross margin in the fourth quarter was 21%.

Selling, general and administrative expenses in the fourth quarter of fiscal 2012 were $4.4 million, compared to $6.4 million in the preceding quarter, a 32% reduction. The decrease in SG&A expense was primarily due to lower commissions and shipping costs related to lower revenues, and also reflects company-wide cost-control initiatives. Research and Development expense was $3.9 million in the fourth quarter, compared to $3.7 million in the preceding quarter, primarily reflecting continued investment in our solar ion implant project, along with other ongoing solar R&D projects. We recorded a goodwill impairment charge in the fourth quarter of $4.7 million, due primarily to the current supply/demand imbalance in the solar equipment market, the expectation that the market downturn will continue in 2013, and the decline in the market value of shares of solar companies.

Depreciation and amortization in the fourth quarter of fiscal 2012 was $600,000, compared to $700,000 in the third quarter of 2012. Included in the fourth quarter of fiscal 2012 results is $422,000 of stock option expense, compared to $372,000 in the fiscal fourth quarter year-ago, and $438,000 in the third quarter of fiscal 2012. The income tax benefit in the fourth quarter of fiscal 2012 was $3.7 million, resulting in an effective tax rate of approximately 18%. The effective tax rate is lower than the US tax rate of 34%, due primarily to our inability to currently recognize, for tax purposes, the losses at the Kingstone operations in China, and the lower statutory rate of 25%, applicable to losses incurred in our Dutch operations.

Net loss for the fourth quarter of fiscal 2012 was $14.1 million, or $1.49 per share. Included in there is $1.22 per share of non-cash charges for impairment inventory write-downs and loss on firm purchase commitments. Net loss was $3 million, or $0.31 per share in the preceding quarter. And net income was $3.1 million, or $0.31 per share in the fourth quarter of fiscal 2011. Total revenue by geographic region for the fiscal fourth quarter was -- in the Asia-Pacific region at 28%, Europe at 24%, and North America at 48%.

Our previously announced cost-reduction plans are essentially complete, including substantial reductions in our solar headcount and corporate cost. We have eliminated nonessential research and development costs, and expect our R&D costs in fiscal 2013 to be substantially less than fiscal 2012, as we transition many of our key projects into production. Further cost-reduction plans are in process and are closely tied with the extended downturn. We are focused on managing our cash while continuing to maintain premier customer service, including the continued investment in next-generation technology solutions for the solar industry. We anticipate that the current challenges in the solar market, combined with our continued investment in key products and technologies, will cause our cash level to decrease during fiscal 2013, but to levels we believe our manageable beyond 2013.

Now I'll highlight some full-year results. Fiscal 2012 net revenue was $81.5 million, compared to 2011's net revenue of $246.7 million. Revenue decrease reflects lower demand of the solar and LED industry, partially offset by increased demand from the semiconductor market. Gross margin was 11% in fiscal 2012, compared to 37% in 2011. Gross margin was negatively impacted in 2012 due to a slowdown in the solar industry, as well as a write-down of inventory, and loss of firm purchase commitments totaling $12.8 million. For the full year, SG&A expenses were $23.1 million or 28% of revenue, as compared to $43.7 million or 18% of revenue for fiscal 2011. Our net loss for the full year was $23 million or $2.43 per share, which includes $1.58 per share of non-cash charges for impairment inventory write-downs and loss on firm purchase commitments. Fiscal 2011 net income was $22.9 million or $2.34 per diluted share.

We continue to maintain a solid financial position, essentially no debt, and total unrestricted cash and cash equivalents of $46.7 million, compared to $42.3 million at June 30. The increase in cash was primarily due to strong receivable collections and other working capital efforts. At September 30, 2012, we had working capital of approximately $60.2 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 the appropriate level. Over the course of fiscal 2012, we have reduced our purchase commitments by approximately $35 million. The supply/demand imbalance for solar cells and modules continues to impact an entire solar supply chain, and is expected to continue in fiscal 2013. Therefore, the Company will not be providing quarterly or annual guidance until there is better visibility regarding forward demand. This concludes the prepared remarks section of our conference call. Operator, would you please open the call to questions?

At this time we will begin the question-and-answer session.

(Operator Instructions)

Jeff Osborne from Stifel Nicolaus.

Great, thanks, guys. Just a few quick ones here. Brad, you mentioned some further cost-cutting initiatives. Is there any way you could kind of quantify that on a sequential basis or how we should think about timing and magnitude?

Well, as we mentioned in prepared remarks, the cost-cutting measures that we announced back in August that we said that was annualized $6 million to $7 million reduction in cost, we essentially -- that is complete. We should see the benefit of that going forward in this quarter and the quarters throughout fiscal 2013. Additional cost-cutting efforts are not to that magnitude because this is a significant cut that we did in August. But it's incremental to that amount.

Got you, okay. And then maybe for Fokko, if you could just talk about the ion implant development. And I think there was some debate about the cost and the cash usage about building a second or third prototype -- I forget what number you are on. But if you could just give us an update in terms of the interest both within China, which I imagine is pretty low, but more importantly, potentially the opportunity outside of China.

Hi, Jeff. Well, let me first do the last bit. And yes, there is interest both inside and outside China. It is not that the interest in China is less than outside, but we're really, really glad that there is also a good interest outside of China, which in the beginning, we had not expected. The development is going well, but it is not just a process we do in the ion implant. If you make such a major change in a technology, it requires us to look at all steps in itself. And that is where, at this moment, most of the work is being done to have a complete cell with all the changes that are needed once you go and use the ion implant and really see good progress. But of course, we put our target high, so that means we have not reached the final goal, but the development is going well and continues to improve.

Understand. Good to hear, as well, the interest in both geographies there. And just the last one for me. You know, on a non-solar piece, recognizing that solar clearly is a challenged-structurally industry right now. But as it relates to your electronics business what are you seeing from that side? And you had an emerging kind of LED exposure, as well. Any comments on that and how we should think about that heading into Chinese New Year in Q1 and things like that?

Well, first the electronics -- we had a really good year in 2012 for the semiconductor side. Semiconductor is also not really booming, so some of our important customers may not necessarily have the same investment plans for 2013, at least not in the first-half of it, as it had last year. So that will also be a little bit less than before. LED continues to be also a challenge. Over the last years, it was somewhat similar to the solar. So that is also an area where in the first quarters we will still be relatively weak.

Understand. Thanks much for the detail, and good luck.

Mark Miller from Noble Financial.

In terms of your inventory and your goodwill charges, are we done with that for the foreseeable future?

We always like to be done with it. I think we try to be fairly conservative in our estimate. So as long as 2013 kind of plays out, it's going to be a difficult year and I think we anticipated that in our analysis.

So for non-controllable interest, you had a significant improvement there. And I just was wondering -- in fact, over the last two quarters. Do you see that continuing? I mean, can you give us any color about that?

Which interest, Mark?

Well, the non -- the 2.25 -- it's a net gain, I guess, because it was subtracted from income. Or attributed to non-controllable interest.

What that relates to is, we own 55% of Kingstone, which is essentially the development company in Shanghai that is developing and producing the ion implanter. But for accounting purposes, we consolidate 100% and we back out their 45% of it. And it happened to be that you're generating losses right now, so the net losses are backed out from Amtech's losses. That's a little counterintuitive when you look at the financial -- the income statement. But generally, if there's more losses at Kingstone, you're going to see that go up, as far as the -- eliminating their portion of the losses for Amtech. So net/net, we pick up 55% of the losses from Kingstone.

You feel that they're increases or decreases next year? Per quarter.

Well, we expect R&D overall to be substantially lower, so we would expect that to be lower also.

Any [signs] on the tax rate for next year? Is it going to stay around 18%, 20%?

Difficult to predict because it depends on exactly if income or losses in which jurisdictions. Currently, because Kingstone has been really a start-up company, has not generated profits yet -- obviously we expect that at some point in time, but those losses right now we receive no benefit for. And I think that will continue in 2013. And therefore, for an effective tax rate, it's going to be difficult. And the closer you get to where you're at from a break-even standpoint, the more pronounced are some of the items that are not deductible for tax purposes. So it could swing quite a bit either way.

And finally, I believe Intevac is also trying to market, and is at a similar stage you are for ion implanters. Just wondering about competition from them or anybody else in that area, what you are seeing.

Well, there is, of course, one very big competitor who has been in this market for a long time, and they have a strong position. And the name Intevac you mentioned, yes, they do produce an alternative form of ion implant, which does not have a mass separation. Yes, it is a competitor. But I am -- strongly believe we have a much better machine. But then again, the customers will have to decide, ultimately. And I do not have any results of what they do. So we only concentrate on what we have, and we believe we are on the right track with this one.

And your advantages over Varian are higher throughput or lower cost of operator ownership?

It's a combination. The machine is of course, first of all dedicated, built specifically for solar. And of course the big semiconductor machine that was adjusted to work well was solar, was not really designed as a solar ion implanter. So I think there we have, at this moment, an advantage. And secondly, our cost to manufacturing in China still with quality and technology which is very much to our standards we know in the United States and Europe. And it still has a lower cost. So there we have an advantage. And having been built and designed as a solar machine, throughput is higher than existing competitive machines with the same mass separation. So there, I believe, both in cost of ownership and throughput, at this moment, we have some advantage. But then again we need the market to get better to be able to really prove that in volume production.

Thank you.

Howard Halpern from Taglich Brothers.

Hi, Brad. Try to pin you down just a little bit on in terms of R&D research expense. Would you describe to that it would be closer to the 2011 number than the 2012 number? Closer to $6 million than $14 million?

Yes, well, it's obviously going to be substantially lower because that's what we said. And so I would just take that into account in analyzing that.

Okay. And in general terms you have a large established customer base. Have they come -- is there any revenue potential from maintenance or internal projects that can help in 2013?

Well, first of all we still have some work to do in some of the machines that still need final acceptance. And generally, I have to say in Asia, and in particularly China, where is our largest installed base, they expect service with -- you know, the meaning of that word is rather wide. And there may be some revenue that we could get out of that. But for now, we really aim on making sure that our customers have machines that work extremely well. And so they also are able to provide the production with a good and reliable tool.

So a lot of them are getting back to high-volume again. And the loads are getting better and better. We fully support them on that. And yes, at some point in time, we may get a little bit of revenue out of that, and we're working on that. But in customer satisfaction here, and helping them to get back into full production or improve a little bit of technology here and there, at this moment is more important than small revenue. But everywhere we can, of course we will.

And one last one. Just in a macro sense, what are the keys that you are looking to that will give you some encouragement, hopefully towards the end of fiscal '13? What are you looking for out there to see?

Well, that's a difficult question to answer. First of all, what is important for us is that during this fiscal year 2013, we will be successful in getting one or more customers that kind of work on the entire technology. That's an important one because new entrants in that technology and getting somebody to the high-efficiency end-type, for us is a benchmark. And we really hope we will be able to do that during this year. And we will also -- another important one is that we do see some of our important customers doing some further expansions. Although not many have been mentioned so far. But that will be a sign that some of the bigger customers expanding a bit is an important message to the market, that when they believe in it and start an investment. And that might be a turning point again.

Thanks, guys.

(Operator Instructions)

Gordon Johnson from Axiom Capital.

Thanks for taking the question, gentlemen. I'm just looking at your incremental orders. Just looking at your backlog this quarter, plus your backlog last quarter, less revenues. And it looks like, at least for the first time in a while, you guys have had negative incremental orders, which would suggest order cancellations. Those have been negative in the past two quarters, negative $6 million this quarter, and negative $7.5 million last quarter. Should we expect order cancellations to continue through 2013? And I have a follow-up.

With the -- Gordon, it's Brad. With the cancellations, our cancellations that we had were already pushed out. I think more what's happening is some of those orders, small orders in this fourth quarter, we pushed out beyond 12 months. Now could those at some point in time turn into cancellations? It could, but at least they're out of the backlog right now. Of course, we work closely with customers and hope at some point in time we will be able to turn those into shipments. As far as what could happen in the future, we don't have that much left -- there is not that much left in backlog to push out anyway. So I think we did a pretty good job looking at evaluating each of our customers, and their status as of September 30. I think we don't see that trend continuing at that level.

Yes. Would it be fair to say that you will continue to see -- I mean, just over the near-term, given your negative comments on the overall market backdrop, we continue to see some modest level of negative incremental orders for maybe another two or three -- or one or two quarters?

Well, the next couple of quarters will definitely be difficult. What we said, overall, the fiscal year is going to be difficult. So we'll just have to see how each quarter plays out.

Okay. And looking at your book-to-bill ratio. It's about 0.5 right now. That was a big improvement from the fiscal third quarter of 0.25. Should we expect that book-to-bill ratio to continue improving? Or should we expect it to stabilize around this level as you work through this tough period?

We haven't given any specific guidance as to what our booking versus shipments are going to be. So to try to give out a book-to-bill, which is basically the mathematical results of shipment versus orders, would be difficult to do right now. And we are just not giving any kind of specific guidance as to what those book-to-bills will be. But it's a difficult operating environment that we're in right now.

Right. And then I think this question was asked but I just want to make sure I'm clear here. I'm just looking at your -- this is your day sales outstanding of 150 days, which is -- it looks like a historical high. Is there any potential that you will have to write down receivables? It seems like a quite long extension of credit to your customers.

Yes, if you look at the balance sheet, the receivables are split up between two categories, billed and unbilled.

Yes.

The billed are at 62 days. And the unbilled are at 88 days. Unbilled is really the deferred revenue that is associated with shipments that have already been made. So it's important, I think, to split those up and look at them. I would say, actually, our collections have been fairly good. And we evaluate customer by customer. And went through that process and scrutinized each of them, especially at year-end, as part of our review that we do all the time, and the auditors review. So we feel pretty comfortable with the reservations that we have on our receivables. And our number of days, 62 days, which we would like to have lower. Everyone would. It's not unreasonable, I think, in the current working environment that we are in.

Okay. And then lastly, what signs of, I guess, strength or potential -- you know, the sun coming back out to shine, if you will, do you guys see with respect to some of your customers and their order patterns? Clearly you guys are saying that things are going to be tough over the near-term, and that's understandable. But is there any light at the end of the tunnel that you guys can point us to maybe for the second half of 2013? Or what you guys are seeing? What is the positive, I guess, data point that you guys are seeing that maybe can help us see the light at the end of the tunnel here?

Well, let me first say something else. What I do believe is that more and more customers are realizing that if they -- in order to come back to profitability, in order to be able to have some reasonable margins in the foreseeable future, cutting cost is not going to be the only way to achieve that. And I think more and more do realize that if the cells are not at sufficient and high-efficiency, and the modules are not above 260-watt or 250- to 260-watt, it's very difficult to sell. So that more and more do realize that they need to go to higher efficiencies. And once they really start implementing some of these higher efficiency technologies, which we believe they must -- and that's also why we so much emphasize that this R&D remains to be extremely important for the near-term future. I think that's the moment when you will see some light.

And again, some may do some expansions, and that's another sign, as I said, so far. Whether that will be during this fiscal year or is it really going to be in the later part of 2013, we will have to see that in the next one or two quarters. So I cannot say that that is going to be immediately as of that time. But that's all I can say about it, I think.

Okay, thanks, that's helpful. Thanks a lot, gentlemen. Good luck.

(Operator Instructions)

Spencer Lehman from Financial West.

Yes, with the recent national election, do you see any impact on the industry as far as the political climate in the solar industry?

From a political standpoint, I'm sure the current presidency is more favorable to renewables, including solar. So I think that should overall be a positive. But we've got to get through some current fiscal difficulties to make that more clear.

Okay, thank you.

And at this time, I'm showing no additional questions. I would like to turn the conference call back over to management for any closing remarks.

Thank you 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.

And ladies and gentlemen, we thank you for attending today's conference. It has now concluded. You may now disconnect your telephone lines.