Amtech Systems Inc (ASYS) 2015 Q3 法說會逐字稿

Welcome to the Amtech Systems fiscal 2015 third-quarter results conference call.

(Operator Instructions)

Please note this call is being recorded. I would now like to turn the conference over to Brad Anderson, Amtech Systems Chief Financial Officer. Please go ahead, sir.

Good afternoon and thank you for joining us for Amtech Systems fiscal year 2015 third-quarter results conference call. On the call today are J.S. Whang, Amtech's Exeuctive 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 third quarter of fiscal 2015 ending June 30, 2015. That earnings 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. Please refer to the risk factors detailed in our Securities and Exchange Commission filings including our Form 10-K and Forms 10-Q.

J.S. Whang, our Exeuctive Chairman, will start our discussion today. Fokko Pentinga, our President and Chief Executive Officer, will update you on progress made in our fiscal year and third quarter. And I will then discuss the third-quarter financial results and outlook.

I will now turn the call to J.S. Whang, our Exeuctive Chairman, to begin the discussion. J.S.?

Thank you, Brad. Thank you for joining us today.

As highlighted in our press release earlier today we are pleased with notable progress points in Q3 with respect to recognized value of our technologies in the marketplace. As always we look forward to continuing to maximize our near- and long-term opportunities and our objectives are consistent in that we intend to continue to advance our technologies, build upon our strategic and our personal strength, deepen our relations with the long-standing core customers and expand our market reach.

The ultimate objective is to realize profitable growth and enhance value of shareholders. We plan to continue to invest in our technologies to ensure we maintain our strong market position and ensure that we are the number one partner for our customers in the next spending cycle.

Although the solar equipment spending environment today is narrowly focused on selective capacity additions and upgrades, we also see much interest in our developing technologies. Therefore, we remain highly focused on our R&D and product development to ensure that we are well positioned to meet and exceed our customers' needs for tomorrow and beyond.

To mitigate the cyclical impact inherent in our business we took steps in fiscal 2015 to diversify our revenue and cash flow with the acquisition of BTU. We are pleased to report that the integration of BTU has gone well. Furthermore, we are confident that the acquisition of SoLayTec has enhanced out industry-leading solar technology offerings.

I will now turn the discussion over to Fokko. Fokko?

Thank you J.S. I am pleased to report on several accomplishments in the quarter. Although we continue to find ourselves in a soft demand marketplace we saw progress from several angles that further validate meaningfulness and capabilities of our technologies in the marketplace.

We received field acceptance of our PECVD systems from a large Japanese solar customer and we shipped and expanded portfolio of solar equipment including PECVD high density diffusion, plus we received another solar order for our atomic layer deposition tool. During the third quarter of fiscal 2015 we shipped our highest level of solar equipment since the September quarter of 2011.

Talking with customers we validate each day that our investments during the down cycle substantially expanded our solar offerings and increased our addressable and served markets. Investments have been an integral part of our efforts to establish new customer relationships.

Today we deliver a broader market and have a more diverse and compelling product mix. Our long-standing and new customers recognize us as a key provider supporting the full range of high-efficiency technologies including PERC and N-type.

Fundamentals of the solar market continue to improve. Global demand for solar increases each year and investments are being made in the next generation high-efficiency cell and module solutions. We do see a significant number of our customers planning for increased capacity in the next 12 months.

In July we announced the signing of an agreement to restructure our solar ion implant investment which will bring cash into Amtech and new capital into Kingstone to further develop the ion implant products. We will continue to participate in the solar ion implant businesses worldwide on exclusive selling rights and a minority interest in Kingstone. The transaction is subject to customary closing conditions and regulatory approvals in both Shanghai and Hong Kong.

Now I would like to provide you with an update on BTU and our integration process. Integration and cost reduction plans are continuing as expected.

Current softness in the semiconductor and electronics markets has dampened revenue and operation results. This results in some additional restructuring activities in the month of July.

Our SoLayTec acquisition at the tail end of the calendar of 2014 expanded our technology portfolio with state-of-the-art technology for high-efficiency cells including PERC. SoLayTec's atomic layer deposition tool is a key component. In this quarter we were pleased report that we received a repeat order for our production ALD tool.

Our LED business continues to contribute. And it's modest growth but stable business and a nice contributor with respect to our goal to have a diversified mix of revenues.

And now Brad will go over the third-quarter financial results.

Thank you Fokko. At June 30, 2015 our total backlog was $36.9 million. This compares to total backlog of $56 million March 31.

Our total backlog at June 30, 2015 includes $32.4 million in solar orders and deferred revenue compared to solar backlog of $41.4 million at March 31. Foreign exchange caused an $800,000 increase in our backlog in the June quarter due to the strengthening of the euro versus the US dollar. And as a reminder our backlog includes deferred revenue and customer orders that are expected to ship within the next 12 months.

Total customer orders in the third quarter of fiscal 2015 were $30 million of which $13 million were solar. This compares to $31 million in the preceding quarter including $16 million of solar. In the third quarter of fiscal 2014 orders totaled $18 million including $12 million of solar.

Net revenue for the third quarter of fiscal 2015 was $40 million, an increase of 65% compared to $24.3 million in the preceding quarter, an increase of 335% compared to $9.2 million in the third quarter of fiscal 2014. The increase is due primarily to higher solar revenues and the inclusion of BT revenues since January 30 at this year.

Gross margin in the third quarter of fiscal 2015 was 25% compared to 28% in the preceding quarter and 18% in the third quarter of fiscal 2014. The lower margin sequentially resulted primarily from lower capacity utilization from our semiconductor business in the most recent quarter. Compared to the same quarter in fiscal 2014 gross margins improved primarily as a result of higher volumes in our solar business and was supplemented by the inclusion of BTU in the fiscal 2015 results.

Our selling, general and administrative expenses in the third quarter of fiscal 2015 were $10.1 million compared to $8.1 million in the preceding quarter and $4.1 million in the third quarter of fiscal 2014. Sequentially the increase results primarily from inclusion of BTU's SG&A for a full quarter. Compared to the same quarter in fiscal 2014 the increase results primarily again from inclusion of BTU's SG&A since January 30 this year and higher selling expenses related to higher revenues.

Our research, development and engineering expense was $1.3 million in the third quarter of fiscal 2015 compared to $750,000 in the preceding quarter and $1.4 million in the third quarter year ago. The sequential increase in RD&E expenses primarily due to lower recognition of government grant funding during the third fiscal quarter compared to the second fiscal quarter. Compared to the same quarter in fiscal 2014, RD&E expense decreased due to higher recognition of government grant funding offset by increased spending due to the inclusion of RD&E expense of BTU and SoLayTec.

Depreciation and amortization in the third quarter of fiscal 2015 was $847,000 compared to $937,000 in the preceding quarter and $591,000 in the third quarter of fiscal 2014. The sequential decrease is due to certain intangible assets becoming fully amortized. The increase compared to the same quarter a year ago again is primarily due to the acquisitions of BTU and SoLayTec.

Included in the third-quarter fiscal 2015 results is $296,000 of stock option expense compared to $336,000 in the preceding quarter and $230,000 in the fiscal third quarter a year ago. Income tax expense in the third quarter of fiscal 2015 was $290,000 compared to $170,000 for the second quarter of fiscal 2015 and approximately $1.3 million in the third quarter of fiscal 2014. Despite the pretax loss of the quarter we did not recognize a tax benefit primarily due to losses in tax jurisdictions where we cannot recognize tax benefits.

The net loss for the third quarter of fiscal 2015 was $1.6 million, or $0.12 per share compared to a net loss of $2.3 million, or $0.19 per share in the preceding quarter. Net loss for the third quarter a year ago was $5.3 million, or $0.53 per share. Total revenue by geographic region for fiscal third quarter was the North American region at 27%, Asia-Pacific at 59% and Europe at 14%.

Our financial position remains strong with total unrestricted cash and cash equivalents of $23.7 million compared to $32.6 million at March 31, 2015. The decrease in cash is due primarily to tax payments of $4.8 million and investments in new products and operating losses during the quarter. At June 30, 2015 we had working capital of approximately $41.7 million.

Let me turn now for a moment to our outlook. We expect revenues for the quarter ending September 30, 2015 to be in the range of $26 million to $28 million. Gross margin for the quarter ending September 30, 2015 is expected to be in the mid to high 20% range with operating margin negative due primarily to higher RD&E expense resulting from lower government grant recognition.

Operating results could be impacted by the timing of system shipments, the net impact of revenue deferral on those shipments and recognition of revenue based on customer acceptances all of which can have a significant effect on operating results. Operating results could also be significantly impacted by the timing of recognition of government grant revenue related to research and development projects in China and the Netherlands.

A substantial portion of our revenues are denominated in euros. The revenue outlook provided in this press release is based on an assumed exchange rate between the United States dollar and the euro. A significant decrease in the value of the Europe in relation to the United States dollar could cause actual revenues to be lower than anticipated.

This concludes the prepared remarks portion of our conference call. Operator, would you please open the call to questions?

(Operator Instructions) Sven Eenmaa, Stifel.

Hi, thanks for taking my question. I first wanted to ask regarding your commentary on your customers' capacity expansion plans going into over the next 12 months. I think you sounded rather positive on that front.

What is the expected timing here of the initial quoting activity versus moving to the order stage? Do you see the order volume you mentioned lasting through end of this year, is it 2016? The improvement trajectory or how should we think about this?

Sven, this is Fokko here. You know that's always a little flexible. We are now talking to a lot of customers and they explained to us their plans and we are quoting for that.

Some projects are in earlier stage, some are a little bit more developed, some need some permits maybe in countries not China. So it's a little bit of a mixed but over the last month so the activity and plans that we have been involved in get more and more.

And in some countries even though you are working on projects and they seem to be closed, and like in India sometimes it takes a little longer. But it's a right mix but over the amount of projects that are ongoing it is certainly currently large compared to the 4 or 5 gigawatt of projects that now are being executed where the order has already been done.

Most of those were outside of China. So there is good activity at the moment, yes.

That's good to hear. On the semi-reflow side obviously that market has slowed. Could you give us an indication of what is in terms of next quarter's guidance, what is the revenue mix expected to be there in semi- versus solar side?

I will do a first bit and then Brad a bit more. We originally of course come from the semi- industry and now for the last years it was solar only and now it's much more semi.

And yes, the downturn in semi- was a little bit unexpected for us but it's standard in this industry that it goes ups and downs. The mix, it will last a few quarters I think but the mix for the future, Brad, maybe you have some ideas on that?

Sure, sure. Obviously we were heavier this quarter with solar. I think you'll continue to see a little more dominance from solar say in the September quarter but with more of semi- picking up as far as a percentage mix. So solar won't be as dominant in the September quarter as it was in this last June quarter.

Got it. And the final question I want to ask regarding the Kingstone deal, what is the expectation there in terms -- is there a reduction of R&D spending for you on a consolidated basis?

With Kingstone, yes, there will be. We would expect to see a reduction. Once the transaction is completed and finalized we would expect to see a reduction in our RD&E.

Could you quantify that?

Not at this time.

Okay, thanks so much.

Jeff Osborne, Cowen.

Thanks for taking the question. Just a couple.

Brad you mentioned that R&D would be up in the September quarter just due to the lack of government grants. Is there a way you can quantify that?

Sure. Well in our 10-Q we've disclosed how much we've actually recognized and I believe it is about $2.3 million in the June quarter and is maybe $500,000 higher than that, about $2.8 million I think or $2.5 million in the March quarter. It will be substantially less than that is our expectation right now of how much there is left to be, so call it we don't see it being higher than say $500,000 to $1 million.

So I just want to make sure I understand you right, it sounds like you're reported GAAP OpEx number for R&D will be closer to $2 million, $500,000 higher than the current run rate?

Actually, probably $1 million, $1.5 million higher but then that will be expected to be offset if we close the Kingstone transaction before September 30. So just the guidance we've given right now assumes that Kingstone is still part of Amtech through September 30.

Obviously that could be adjusted if the transaction closes before September 30. We're pushing for that but you've got regulatory hurdles that you have to go through so we're just being a little more conservative by excluding it, by including Kingstone in our September 30.

Okay, that makes sense. And then just for Fokko I had a couple of questions on the broader market.

One on the BTU side, can you just touch on some of the softness there it looks like this quarter, is that coming from the S&P side, packaging, where is the actual product line that's weaker for them and any sense on why? Is it just market dynamics or with the acquisition was there some lost customers? That would be helpful.

And then just kind of two questions on the solar side, one is what kind of activity are you seeing with the Tier 2 producers? Would be helpful to listen in on.

As well as if you can rank order the interest level that you mentioned picked up in the last 30 days. Is this on the classic diffusion side or on the SoLayTec piece or PECVD or a combination of all three?

Okay, the first one BTU, yes, it is the packaging and both the normal reflow, the soldering of printed circuit boards and also the semi packaging. The industry, the whole semiconductor industry has been adjusting their forecast a couple of times already this year from 5 to 3 to 2. So there is a bit of a change over the last, starting beginning of this year semiconductor industry really forecasting lower numbers.

And of course the last year was pretty good so there was quite a bit of production capacity for printed circuit boards soldering, reflow soldering done last year so that also they are about held for it this year because then last year was a little bit much and this year everything is down. It's pretty much for everybody maybe the very, very front end, the ASMLs and Applied Materials maybe not so much. But in general semi- is down and that makes a big, big difference there and it's both for semiconductor packaging, soldering as for reflow soldering for printed circuit boards.

Now to solar, for the last one is it for one product? Well diffusion continues to be our number one product, so yes, that's the majority but the interest in the ALD SoLayTec combined with PECVD is an important one too because it's the new market and a lot of the new projects will at least have the capability for being able to run PERC.

PERC has taken off quite strong. We are a little bit on the later part of that cycle because our ALD tool we just got involved just half a year ago but that is where a large portion is as well. And with PECVD we now proved in quite a few customers that it's a very reliable tool, very good tool, but again the diffusion remains to be the largest.

Now it's only the Tier 1s are also some of the Tier 2s, we also see more activity now at the Tier 2s. If you look back let's say a quarter, even a bit more with the procurement of the equipment for the lines that were built outside of China these were the Tier 1s because for Tier 2s to go outside China that is not -- they couldn't do that.

So we see now a combination of course Tier 1 is most predominant but also Tier 2s are starting to look into increase in capacity. And a bit of a mix, we said N-type yes, more are looking into N-type not as a technology buy from us but we happen to have a nice set of equipment where you can really do the N-types, so we do have a very good position and PERC is of course an important one. But it's a mix for all the equipment.

Fokko, If I could add to that, Jeff, just going back quickly to BTU one of the questions you asked was would the acquisition possibly losing any customers and no, that's not the case at all. In fact, I would say with the acquisition we've brought BTU has brought a very increased amount of focus to the SMT and semi- packaging product portfolio that they offer. So I think they are highly focused and energized on protecting and growing their reflow business.

Excellent, I assumed that was the case. I just wanted to double check with the weakness this quarter. I appreciate the details from both of you.

Mark Miller, Benchmark Company.

Just wondering if you could give us a ballpark figure. You said quoting activity is up and you think it will be larger than the recent capacity additions which I think you estimated at 3 to 5 gigawatts. Can you give us any ballpark feel in terms of the potential of the next round?

This is a tough one, Mark, but I think it's significantly more than the last round I'd almost say. If I pick a number it's a double.

Okay, that's encouraging. Just was wondering, I was a little surprised by this tax payment of $4.8 million. Can you give us some more color what was going on with that?

Sure, Mark. It relates to several years ago when we were profitable there was a refund received in one country in the Netherlands which resulted in a reduction in foreign tax credits in the US.

So we've been disclosing in our MD&A and liquidity and capital resources that commitment that we have to make that payment over the last couple of years. And we basically pushed off that payment as long as we could and we had to make that payment this quarter. So it's really related to prior earnings from several years ago is what it relates to.

So nothing new or nothing to really be forecasting going forward. It really was more of a one-time event.

And the other part of the drop in cash you said it was R&D but also operation. I'm just wondering in terms of your new acquisitions SoLayTec and also BTU, how much drain were they in terms of operational cash drain?

Yes, BTU we've gone through planned restructuring. We did modestly a little bit more here in July. They are really not a drain, much of a drain.

SoLayTec is in the development. They also have existing product but there is development costs associated with that. So you see them in a cash negative position currently.

But that was planned and assumed that they would be in that kind of position at least early on as they develop and secure their marketplace, their place in the PERC market. I think that's been shown to start to turn positive with this recent repeat order for their atomic layer deposition tool for a Tier 1 customer for their PERC process.

Would it be fair to say in terms of the cash drain from the legacy, your legacy Amtech operations, was it sizable? Was it larger than the cash drain from legacy Amtech or same size or I just was wondering?

Yes, it was fairly equal across divisions this quarter.

All three. Then just one final question. I guess you caught some investors by surprise and I can understand now just looking at this tax payment and other things the sale of the Kingstone, but was anything beyond cash and in terms of development of the implant market do you feel that's developing as expected or is that developing more slowly that opportunity overall for the whole industry?

I will try first, Fokko, and then you can chime in if you want to. But Mark as it relates to the ion implant I think a little bit of history is important here. We did this acquisition, made this investment back in 2011 and there was another very large company that was aggressively getting into that solar market.

As the products matured and developed to become production-worthy tools and looking at the impact on the markets and without getting too technical primarily the market initially what people were looking at was P-type mono market for this product. It really wasn't making enough of a difference in efficiency to make the cost of ownership work and then you had the advent of additional improvements in P multi wafers, paste related to that, improvement in efficiencies and that market for P mono really is very small.

So that market opportunity that looked like it was much bigger at the time is smaller. In addition, the market for N-type or other more complex cell structures has developed but not developed say as quickly as everyone in the entire industry, not just for us but in the entire industry thought was going to happen. And there was an opportunity to monetize some of our R&D investment.

You don't get that opportunity that often. And so there was an opportunity for us and we're right in the middle of trying to execute that and still maintain some business interest in the future of it.

Thank you.

Aaron Martin, AIGH Investment Partners.

Hi, it's Aaron Martin from AIGH. Congratulations on the high number of shipments this quarter. When I look at your guidance and then look at the shipments in this quarter are you expecting to not get acceptance in the September quarter on a bunch of your shipments that were in the June quarter?

No, just some of the orders that are in backlog are expected to be shipped in the December quarter versus September. So the guidance just reflects expected I think shipment of product out of backlog.

Got it. And I think I know the answer to this but you haven't recognized any revenue from Kingstone, is that correct?

That's correct.

Okay, so when you talked about it that does close the R&D expense will go down. What has the Kingstone R&D level been like in the quarterly level that you've been -- that's flowing through your P&L?

It's fluctuated because part of that's timing of when we recognize the government grant funding which we've done. But on an ongoing basis they probably have been anywhere from depending on level of projects they're working on $500,000 to over a little over $1 million a quarter.

Got it. And with SoLayTec you only have a majority ownership so you're going to put that fully in your P&L but when you report orders from the ALD shipments, are you doing the same thing there in terms of just reporting your percentage of it or is the full you're reporting the full order?

Yes, on the order we're reporting the full order because we'll push through both the revenue and the expense to the P&L but then we back out our minority -- back out the minority interest on the bottom line. But in our backlog when the orders report it's 100%.

Okay. Do you have an expectation for shipments in the September quarter?

Expectations for the September quarter as far as shipments is fairly close to what our revenue guidance is.

Okay. And with revenue coming down like this order over quarter, is there shouldn't there be a significant move in terms of more of the revenue being deferred revenue in the September quarter versus the June quarter?

Not necessarily. No, it's just the timing of shipments, so it's a matter of looking at backlog, getting an idea of what we think we're going to book and ship during the quarter. So I think that both those factors play in.

Okay. And then the specific I believe it was 400 megawatt order that you announced, that was included in your solar orders for the June quarter?

That 400 megawatts, that was related to I believe some boron furnaces. So that would have been in backlog I believe well obviously is in backlog as of the end of June. Some of that might've shift already.

Okay, thank you very much.

(Operator Instructions) Gordon Johnson, Wolfe Research.

Hey guys, this is James Bardowski in for Gordon. First, thanks for taking my question. Pretty solid job on the orders.

I guess first, turning back to the cash drain on the quarter it looks like a big piece of that was driven by was it deferred income taxes? Is it safe to say that it relates to the US Netherlands issue that you were discussing before and do we expect that to repeat?

To answer the first question it actually was sitting in our income taxes payable, so it's been showing up as a current liability for a while now. And it does relate to what I had spoke of earlier, the refund received a year or so ago from the Netherlands reduced our foreign tax credit that we can recognize in the US caused the US tax payment going back several years ago to a profitable year. We don't see that as a recurring issue at all.

Okay, great. I guess secondly one of the things that I really pointed to as the benefit to Amtech Systems was your resolve to remain debt-free or at least low debt.

It looks like you drew out about $0.5 million this past quarter. Is there any shift in the capital structure that you guys are targeting or what's behind that?

No, not any shift. Let me just give a little color behind that. Obviously there's two things.

One, there was a mortgage debt that came with the acquisition of BTU. So the largest piece of that is a mortgage on the office and production facility in Billerica, Massachusetts for BTU.

The other part, probably the increase that you were referring to relates to SoLayTec. SoLayTec is the development company we acquired at 51% ownership at the end of December.

Part of their financing is through some debt. That was a combination of all the shareholders putting in additional funding for SoLayTec and for purposes of accounting we have to pick that up on our balance sheet because we consolidate SoLayTec. No real fundamental shift in how we view and manage our capital structure.

Okay. Then I guess also the last time we spoke you mentioned that you guys expect roughly I'd say about $4 million in OpEx synergies related to the BTU acquisition. Regardless of the increase in SG&A are you seeing any of this yet?

Yes, we are. We're starting to see that.

Again as we mentioned we did the acquisition, we expect to hit that run rate within 12 months after acquisition. We're on plan with that. And so we feel confident that we will definitely reach that run rate.

Okay, great. Also about what percentage of Amtech's revenues are EUR as well as what percentage of production cost?

The euro versus dollar from a revenue standpoint probably, well it depends on each quarter. But Tempress which is our solar subsidiary in the Netherlands for example this quarter if you look at solar revenues essentially consider those to be euros and the rest non-euros. That's really the way to look at it.

Okay. And I guess I could probably infer costs from that?

Yes, yes, costs are pretty much in line and match with the revenues. So if we've got revenues in euros we typically have costs in euros and if we have revenues in dollars we typically have cost in dollars.

Okay, perfect. And then I guess finally real quick, you mentioned that part of the reason your margins were down were due to lower utilization on the semiconductor side. What is a typical utilization rate, I guess what would you call normal and what did you see in that last quarter?

Well, we got to see 100% but --

Indeed.

But I don't have a specific percentage that we've talked about in here but we're obviously below our optimal level. Optimal level is going to be more on the 90%-plus. So there is opportunities to further leverage the operating model as the semiconductor SMT and semi-packaging markets start to come back to the strength that they were in 2014.

Okay, excellent. That's all for me.

I will turn it back. Thank you very much, guys.

This concludes our question-and-answer session. I would like to the conference back over to management for any closing remarks.

Thank you for your time today and for your interest in Amtech. This will conclude today's call.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.