Amtech Systems Inc (ASYS) 2017 Q3 法說會逐字稿

Greetings.

(Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Mr. Robert Hass, Amtech's Chief Financial Officer.

Please go ahead.

Good afternoon, and thank you for joining us for Amtech's Third Quarter Fiscal 2017 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, Robert Hass, Amtech's Chief Financial Officer.

After the close of trading today, Amtech released its financial results for the third quarter fiscal year 2017 ended June 30, 2017.

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 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 those forward-looking statements are changes in the technologies used by our customers and competitors; change in volatility and demand for our products; the effect of changing worldwide political and economic conditions, including government-funded solar initiatives and trade sanctions; the effect of overall market conditions, including the equity and credit markets and market acceptance risks.

Other risk factors are detailed in our Securities and Exchange Commission filings, including on our Form 10-K and Forms 10-Q.

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

J.S.?

Thank you, Robert.

I'd like to welcome, everyone, and again, thank you for your interest in Amtech.

We appreciate you joining us as we review our Q3 fiscal year 2017 financial results and update you on our market.

We are pleased with how the year is progressing as we enjoyed more good orders, strong financial performance and a return to profitability.

There is strength across all our business segment: solar, semi and polishing.

The investment we made on technologies and products over the last several years have driven us to this return to profitability.

We thank our customers, our people, our technology partners and our suppliers.

The financial result of this quarter are an indicator of what Amtech is capable of.

While we are benefiting from strong market fundamentals, and we see them continuing in the near term, we all know there are cycles to the market.

We believe we are well positioned to successfully manage through these cycles.

Ongoing research and development, innovation and new product development continue to be the fundamental strength of the solar industry.

Like the industry, at Amtech, we continue to invest in the future and take pride in having industry-leading customers and research partners.

We are well positioned for the long term with our continuously evolving, highly distinctive solar technology solutions.

And now, I will turn the discussion over to our CEO.

Fokko?

Thank you, J.S. A warm welcome to everyone who is joining us today on the teleconference and webcast.

Thank you for your interest in Amtech Systems.

We have much to report on today.

Our financial results reflect strong third quarter progress relative to the previous quarters in prior year.

Revenues were up 45% sequentially and 43% year-over-year, which significantly improved operating margins, generating $0.25 in earnings per share, our best performance since our solar business unit peaked in the third and fourth quarter of 2011.

Revenues and margins in the quarter exceeded the guidance range we provided in the beginning of the quarter.

Our performance relative to the guidance we provided on May 10 is the result of Amtech's engine firing on all cylinders.

All business segments reported strong results with a favorable product mix.

We are very pleased to report this return to profitability, made possible by continuously improved marketplace, strong orders converging in a timely way to improve revenue plus the dedicated effort of our global team.

We took in approximately $80 million of orders in the June quarter, including $54 million in our solar segment.

This is the highest level of total orders since the first quarter of 2011.

Orders for the 9 months ended June 30 totaled $183 million, a significant increase of 65% relative to the $111 million in the same period last year.

Our backlog at June 30 stood at $126 million, again, the highest level since Q3 in 2011, providing a very good foundation for the coming quarters.

Our n-type bi-facial solar cell technologies are driving our participation in what appears to be a technology-focused buying cycle in the solar industry.

With our ongoing investment in both n-type and PERC, we have continuously improved cell efficiency and production throughput with our products and technologies.

During the June quarter, our solar subsidiary, Tempress Systems, received a follow-on order for our n-type bi-facial technology, which includes our high-throughput PECVD and diffusion systems.

The first and the second phase of this multiphase 1-gigawatt project are designed to manufacture high-efficiency n-type bi-facial solar cells and modules at an attractive cost per watt.

The second turnkey order is similar in size to the first phase we announced in January from this new customer in China.

Operationally, we shipped part of this first phase in the June quarter.

And together with our vendors and partners, we are making good progress in the continued manufacturing of the equipment and the planning for the installation and startup of the first phase of this very important project.

Now let's discuss our semiconductor and polishing segments.

Our semiconductor segment produced both good volume and margins in this third quarter, reflecting a solid demand in the broader semiconductor packaging and electronic assembly marketplace for our reflow office and diffusion furnace.

As a result, this segment had a very good quarter.

We're making targeted investments in the semi product improvements and new features that are being well received by our customers in order to remain a leading supplier in the market we serve and assure our semi business continues to be a steady contributor to our overall business.

This demand for our semiconductor and electronic products was driven primarily by customers across multiple industries, including electronics and automotive.

Also this quarter, our polishing business continued to provide good margins and profits, which they continued to do so on a very consistent basis.

As the leading global supplier of production equipment and consumables for solar, semiconductor and LED markets, we continue to invest in our future by executing our strategy of growing our solar, also, semi and polishing businesses.

And now Robert will go over our third quarter fiscal 2017 financial results and our Q4 expectations.

Robert?

Thank you, Fokko.

Let us now review our third quarter fiscal year 2017 financial results.

At June 30, 2017, our total order backlog was $125.7 million, of which $98.2 million was solar and that compares to a total backlog as of March 31, 2017, of $87.4 million, of which solar comprised $66.9 million.

Backlog includes deferred revenue and customer orders that are expected to ship within the next 12 months.

Net revenue for the third quarter of fiscal 2017 was $47.8 million compared to $32.9 million in the preceding quarter and $33.3 million in the third quarter of fiscal 2016.

The sequential increase and the increase from the prior year quarter are primarily due to shipments relating to a large turnkey order as well as increased shipments of our semiconductor equipment.

Gross margin in the third quarter of fiscal 2017 was 32% compared to 25% in the preceding quarter and 29% in the third quarter of fiscal 2016.

Sequentially, gross margin increased primarily due to higher sales volume, favorable product mix and a lower net of profit.

The higher gross margin compared to a year ago is primarily due to a higher sales volume and improved product mix, slightly offset by lower usage of previously reserved inventory.

Selling, general and administrative expenses in the third quarter of fiscal 2017 were $10.1 million compared to $8.3 million in the preceding quarter and $8.7 million in the third quarter of fiscal 2016.

Sequentially and compared to the prior year, the increase in selling, general and administrative expenses results primarily from severance, higher commissions and other employee-related expenses.

Depreciation and amortization in the third quarter of fiscal 2017 was $0.6 million compared to $0.6 million in the preceding quarter and $0.7 million in the third quarter of fiscal 2016.

Income tax expense in the third quarter of fiscal 2017 was $1 million compared to $0.2 million in the preceding quarter and $0.1 million in the third quarter of fiscal 2016.

Net income for the third quarter of fiscal 2017 was $3.3 million, or $0.25 per diluted share, compared to a net loss of $1.4 million, or $0.11 per share, in the preceding quarter and a net loss of $1.2 million, or $0.09 per share, in the third quarter of fiscal 2016.

Unrestricted cash and cash equivalents at June 30, 2017, were $39.2 million compared to $38.9 million at March 31, 2017.

Now let's take a look at the outlook.

The company expects revenue for the quarter ending September 30, 2017, to be in the range of $45 million to $48 million.

Gross margin for the quarter ending September 30, 2017, is expected to be in the mid- to high 20% range, with positive operating margin, both influenced by product mix and revenue deferral.

Operating results could be impacted by the timing of system shipments, particularly the first shipment -- the follow-on shipment of the equipment for the turnkey order, the net impact of revenue deferral for those shipments and recognition of revenue based upon customer acceptance, all of which can have a significant effect on operating results.

A substantial portion of Amtech's revenues are denominated in euro.

The revenue outlook provided in this press release is based on an assumed exchange rate between United States dollar and the euro.

A significant decrease in the value of the euro in relationship to the United States dollar could cause actual results to be lower than anticipated.

I'll now turn the call over to the operator to take questions.

(Operator Instructions) The first question comes from Jeff Osborne of Cowen.

Fokko, I was wondering if you can touch on the diversification of revenues.

Certainly, the turnkey n-type bi-facial customer that you talked about the new entrant in China is very encouraging and presents a nice runway ahead of you.

But I'm just trying to get a sense of how diversified the order trends have been in recent quarters and this quarter as well, and then I guess, how much of the backlog is attributed to that one customer.

Yes.

Thanks for asking your questions.

First of all, about the diversification.

If we look at last quarter, I think it was -- if you look at the solar part of it was -- part of it was just for the turnkey, the rest was the individual equipment.

So these were relatively balanced, I think.

And for next quarter, I guess, that's going to be about the same.

So that's not that it's completely unbalanced and only going to the n-type.

We did not give any specific number for each of those phases.

So it also depends, of course, for a little bit further in the future quarters how much individual equipment is coming in.

But there will be periods where a bit more buyers do this turnkey projects that sometimes come to in 1 quarter.

But it's certainly not that it's only the turnkey n-type part.

But for individual equipment, quite a bit of that is on the n-type as well.

That's been our strength.

We used quite a lot of PECVD.

So if you look at n-type as a whole, I would say that's still the vast majority and the rest of it is in the general expenses and PERC-related expenses with the ALDs, for example.

Great.

That's good to hear.

I was hoping that the diversification was there.

I wanted to better understand the gross margin strength in the quarter.

So you talked about mix.

Is there a way that you can translate that?

Because I thought I heard 2 countervailing things.

One, you said, mix was positive, but then you also said the deferred portion, which is usually very profitable revenue, to my understanding, was not there.

But maybe I misheard that, and there was large tranche of deferred revenue that had flowed through that you previously had the cost of goods associated with that in the prior quarters' P&L.

Can you just talk about what, actually, the mix was that drove the favorable balance to have the gross margin strength and then the moving pieces on why that would go down a couple hundred basis points next quarter?

Certainly, Jeff.

This is Robert.

Just a couple of points.

The volume, of course, a myth that we were spreading, semi-fixed and fixed manufacturing costs over a larger volume.

So that certainly helped.

And then relative to the outlook that we provided last quarter, we were expecting the acceptance of a low-margin deferred piece that was to be accepted, and that's been pushed out.

It was basically a 0-margin contract that we'd taken to get an entrance into a market with our 300-millimeter diffusion furnace.

So that didn't -- we didn't have that and that helped us beat our forecast.

Got it.

And maybe just around deferred.

So 300 millimeter, I assume that's on the semi side of the house, not the solar side.

That's correct.

Perfect.

And then for the turnkey bi-facial -- n-type bi-facial customer, my understanding is you're kind of the prime vendor and there's some third-party equipment that you're selling.

Can you just talk about, would all of the pieces of equipment be accepted simultaneously?

Or is there an expectation that the Amtech equipment would be accepted faster and then maybe in future period the third party equipment, which would carry lower margin, to begin with, would flow through?

I'm just trying to get a sense of as that large customer flows through the P&L, what the deferred impact is.

Yes.

I don't think that's gone -- the machines, of course, the installation, that's one of the first phases of different acceptance phases and the machines that go in there, we start them up at the same time as our own equipment.

So they'll come online probably in the same period of time.

It could be deferred couple of weeks.

And if it's at the end of the quarter, it may have an influence.

But all in all, that should be the same.

And once that is done, when all the equipment is running and doing what it's supposed to do, and again, these are all very first-class equipments.

So there is not much risk in that one.

And then we're going to do the integrated process and turn around wafers from front to back and get good cells out of it.

But also, it's been done before, and we have heard from many people that have a lot of experience with this.

So also there, you don't see too much of an issue.

But then, of course, the third phase is that, you have to go and get a total factory running and operating at a certain yield and then that's typically the area when the supply chain is probably something that could give some hiccups here and there.

So that's a little bit further out, but that's not a huge amount.

So all in all, we structured it, so all of these under normal circumstances is very well doable.

And neither for our customer nor for us it would make a lot of sense with such a huge project to take too much risk.

Make sure that you get it running.

And it's been typical for the solar.

Once you get it running, you get your volume through.

That's when the tuning happens.

And then when the engine runs, you can really tune up everything.

But you've got to get through these first.

And all of the equipment is well known and so I don't see too much difficulty there.

And therefore, also, the difference between the third party equipment and our own should be in the same range of timing.

Perfect.

Okay.

And the last question I had is just in light of the Section 201 International Trade Commission investigation, there's been press report that has suggested that the Chinese are possibly evaluating facilities to make cells in the United States.

So I was just curious if you're having any conversations qualitatively with people potentially exploring that should that ruling go through later this year.

Well, frankly, yes, there is exploring and we're talking.

But then, again, I don't think decisions will be made in the short term.

And making solar panel at a good price here is a bit of a challenge.

So I think they will not go over -- make decisions very quickly.

I think that will take some time.

It's not something that I expect in the short term.

The next question comes from Philip Shen of Roth Capital Partners.

As it relates to your pipeline, we have a good deal for what your backlog is.

But in your business development activity beyond the backlog, how is that shaping out?

When I look to our 2017 capacity addition tracker, we were looking on the order of, call it, 18 gigawatt between Tier 1 and Tier 2 capacity expansion globally, with all the announcements that have been made over the past year or so.

Now looking out to 2018, the number is not nearly as large, but was wondering if you guys are in discussions with folks.

Does this technology CapEx will continue as we go through 2018?

Phil, this large number that's been happening over last year '17, yes, that's probably not going to go on next year.

And the other side, if you look what China is planning, they are not really slowing down either.

So that is a help.

Then again, for these large capacity expansions, these require really low-cost machines most of the time.

So we didn't participate large in there.

We participated for a certain part of it.

And I think we've been improving on our costs.

So I think we will be doing a little bit better on that one in '18.

And also, we expect, of course, that the project that we're working on will continue to give us a little bit more.

Next phases are still possible for our n-type project.

So on the general expansion, yes, we will be part of it, definitely, and we will see some growth there.

And it may be less than in '17, but I think we're better positioned for that in '18 than we were for this year.

Great.

I think in the past, we've talked about the potential for a refurbishment cycle.

I know a lot of these orders are currently for greenfield expansion.

Can you give us an update on how that is going, if there's any opportunity for that to take place sometime in 2018?

Yes.

There are requests and opportunities.

How they will materialize is something that's always to be seen.

But for the ones that are running -- a lot of them are moving out to mono if they can get wafers and if they have the chance to go to PERC.

But then, of course, you also can get into space problems.

So giving upgrades for existing machines to significantly increase throughput can get some extra space and have those customers be able to move into the somewhat higher efficiency, which is really needed.

How much of that are ready in 2018, I would more see that in the later part of it, because the first part -- it's already -- our fiscal '18 is already coming relatively close.

So it would be more in the later part of it.

Great.

And wanted to talk about the n-type trend that you guys are seeing.

Clearly, you have your large n-type customer.

And I don't recall this was asked earlier by Jeff, perhaps, it was.

But in your backlog, how much -- it sounds like for -- we could see some more balance with the n-type orders.

But wanted to see as we get into the back half of the year and is that your -- do you see the n-type adoption accelerating, for example?

Like in your report, there's quite a few customers that you mentioned that already have relatively large n-type productions ramping up, and they are not stopping.

So more of that is coming in that area, too.

So that gives opportunity for the individual equipment.

So yes, n-type is the majority of what we do, because the customers also you mentioned in the report are important customers.

So the PECVDs and the borons are important for us, and that's where the majority will be.

The next question comes from Mark Miller of Benchmark.

Just was wondering, in terms of deferred revenues, just wondering how does that break out typically between solar and semi?

Are there much more coming from solar in terms of your deferred revenues?

Yes.

Sometimes, we'll have a large deferral within the semi.

But generally, most of our deferred revenue and recognition of that is related to the solar business.

You've mentioned the auto business was contributing to the strength in semi, and there has been some slowdown there.

Have you noticed anything so far this quarter in terms of orders related to automotive?

No.

Not really.

We haven't seen.

More the opposite.

I think our #1 customer is only ramping up and going faster.

So we didn't see that at all.

Automotive requires -- although the industry sometimes has a period where there's a bit of trouble, there is more and more electronics going in every car.

So that growth is really, really continuing.

So we didn't see -- we saw the opposite of going down.

It's only growing.

Your R&D expenses have been trending down since the last quarter of fiscal '16.

Is that going to continue or going to stabilize around the current level?

Yes.

So they have trended down a little bit, not a lot.

And part of it depends on the recognition of revenue.

I would say that they -- I don't expect it to get any lower than what it is now.

And then finally, you did have some tax you had to pay.

In future profitable quarters, will the tax be relatively the same tax rate?

I think that's reasonably correct.

We've used our NOLs in China.

Those were fully used, and we're making money in that segment of the business.

So yes, I think that's a reasonable assumption.

(Operator Instructions) The next question comes from Orin Hirschman of KIGH (sic) [AIGH] Investment Partners.

Orin Hirschman, AIGH.

A while back, meaning a quarter or 2 ago, I think you'd stated that perhaps you had fallen behind a little bit in some of the leading edge (inaudible) n-type, et cetera.

Can we assume, based on the results we're seeing, that you kind of caught up with the competition at this point?

And then how's that playing out in the big contracts that are coming up where you are maybe pitted against the competition?

Well, I can't quite remember saying that we were lagging behind on the n-type.

But what was the case and still is and we're fighting our way up is in the PERC.

In the PERC, we were in a little bit late.

And both with our ALD and PECVD.

And we're fighting our way up.

And it would be nice if we would be strong and leading in both n-type and PERC.

But at least, we got one of the 2. And the other one uses the same equipment.

And we were not -- the first one was the volume.

So it's -- but we're working our way in there, and there is a lot of expenses in that area, too.

So that's an area where we can still grow a lot.

And all the equipment that we use for that, as I said, is the atomic layer deposition and the PECVD.

Those machines are now very mature and high throughput and the cost is good.

So I think also in that section, we could see some growth over the year.

Any other technological shift that you would point to?

I don't know, perhaps more and more use of ALD where you excel in ALD or something else where it's helping you win business.

Well, for the future, you will see that in order to increase the efficiency, one has to go to, what they call, passivated contacts.

And there, you need a low-pressure CVD, a polysilicon layer with a tunnel oxide.

And that's an area where, I think, we are very strong, but that is still in the R&D stage.

Not in R&D stage only with our sales and our development partners, but quite a few of the customers.

I would say, all of the leading customers are developing processes that use that passivated contact technology.

And that can be used, also, especially on the n-type going to really good efficiency.

So that is something where in the later half of 2018, one could expect some more.

But again, before going into high volume, that always takes a little bit of time.

PERC took many years going from small pilot lines into high volume, and passivated contacts will be the same.

But really, it can be used both in the n-type.

It can be used in the p-type.

So in the future, it's going to be technology that will give efficiencies that can get close to the heterojunction, but without some of the issues that heterojunctions may have.

So we think that's a very important technology for the future.

But in volume, it is still limited, because it's in R&D system.

Some of them in pilot production lines, but it's really a technology where I think we are having a very good position.

And does that mean, though, that there's potential to give it extra leg to operate cycle because of the new necessity of technology?

It's relatively complex.

So before more complex technologies go into really high volume that you could say these are gigawatts, I don't expect it already next year.

That may take a little longer.

Okay.

And just in terms of the big customer that you kind of programmed for, is there more potential within that customer?

Or this is it for a while?

That customer you're referring to our turnkey, and that's a total project of 1 gigawatt.

And we certainly expect some more phases in time to come.

Yes, there is still potential there.

Are you meaning is there potential for them to do multiple (inaudible)?

Well, we're not at -- as I said, with the 2 phases, we are definitely not at the 1 gigawatt yet.

And so before thinking about more than 1 gigawatt at that customer, we first need to make sure that everything that we have on order and possibly hope to get is going perfect.

And that's, of course, the highest chance to get even beyond that plan that they have now.

Okay.

And just finally, just anything you can say even more about the top runner program in China?

We've been talking about it a lot, because we've always been saying over the years we are a technology company.

Of course, we have to make high-quality and very cost-effective and low-cost equipment.

But without that urge for higher efficiencies, it would be difficult to have a good operation in volume, because cost alone is not sufficient.

So yes, there is something where we really fit in for going higher than the normal n-type can do at this moment.

What I mentioned before, this passivated contact is really the next step.

So for a top runner program to have that technology, and that's why a lot of the leading Chinese manufacturers are working on that is that's the next step.

And the top runner program will force that issue that they have to go more and more and there's high efficiency.

And it's perfectly in line with what our strategy is.

This concludes our question-and-answer session.

I would like to turn the conference back over to Robert Hass, Chief Financial Officer, for any closing remarks.

Thank you, everyone, for your time today and for your interest in Amtech Systems.

This concludes our call for today.

Thank you.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.