Amtech Systems, Inc. (ASYS) Q4 2013 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Amtech Systems Fourth Quarter 2013 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Brad Anderson, Chief Financial Officer. Please go ahead.

Thank you, and good afternoon, and for joining us for Amtech Systems Fourth Quarter and Fiscal 2013 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 fourth quarter and full fiscal year ending September 30, 2013. 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. 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 and volatility in the demand for our products; the effect of changing worldwide political and economic conditions, including government-funded solar initiatives; capital expenditures; production levels, including those in Europe and Asia; the effect of overall market conditions, including equity in credit markets and market acceptance risks. Other risk factors are detailed in the company's Securities and Exchange Commission filings, including its Forms 10-K and Forms 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 our views of the current market and how we continue to align our global organization with market demand, and I will then focus and discuss about the fourth quarter 2013 financial results. I will now turn the call over to J.S. Whang, our Executive Chairman, to begin the discussion.

Thank you, Brad. Good afternoon. As we continue to tightly manage our business and plan for the long term, we appreciate your interest in Amtech Systems. While our financial results reflect the challenges of the current solar downcycle, we anticipate improved demands in 2014 for our technology and product based on our current market activities. We are working closely with our customers and potential customers as solar is rapidly becoming global, and we continue to seek opportunities in the newly emerging global market. Even during a very difficult year, we achieved some major milestones: first, we made a substantial progress in transitioning from an equipment supplier to a technology supplier. Fokko will talk more about that. Second, we developed and brought to market our PECVD tool, which will double the size of the market we serve. Third, we secured our first production order for our PECVD tool. Fourth, we obtained another customer for our n-PASHA, a high-efficiency, n-type cell technology. We have streamlined our global operation to successfully manage through this downcycle. We have very tightly organized our global operations with highly capable professionals throughout, and we will further strengthen our technology leadership to stay ahead of our competitors. Fokko will update you on the progress being made with our partners and the never-ending collaboration with our well-respected, industry-leading customers. I will now turn the call to Fokko Pentinga, our CEO of Amtech. Fokko?

Thank you, J.S. Our fiscal 2013 was, without a doubt, a challenging year. But despite the challenges of the current market, I'm happy to report a good progress was made at Amtech. Throughout the year, we continued to restructure our global operations, including periodic reductions in headcount, management salaries and discretionary spending. Today, we continue to be very selective in the allocation of cash across the areas -- all areas of the business and even in the reduced staff environment, our employees' hard work and diligence keep us very well positioned to advance our technologies and provide premier service to our customers. Although demand is soft, activity in the market has increased. We believe that the reason for this increased activity is that our customers have experienced improved utilization rates and see that the end market continues to be growing. Besides the general increase in the market activity, also the interest in new technologies has increased. We continue to engage more and more with current and future customers and we are definitely perceived today as a provider of technology solutions, not only a manufacturer of equipment. Although we have been a leader in our market for some time, being broadly recognized as a provider of technology solutions further strengthens our market position today and as a preferred partner in the next cycle. Regarding our new PECVD tool, I'm very proud of our solar team for developing and bringing to market a product that will compete very effectively for market share. This product essentially doubles our served available market. In June this year, Tempress Systems, our solar subsidiary, received a multi-million dollar order for Tempress advanced diffusion and PECVD equipment, which will be used in Nexolon U.S.A.'s facility in San Antonio, Texas. We have built most of the equipment for this order, and Brad will talk later about the accounting treatment of the PECVD systems [indiscernible]. The compelling points of the n-type bi-facial cell concept technology we also discussed in our last call. These n-PASHA cells used for the bi-facial modules generate electricity from the light from both the front and the back side of the panel, which can generate 10% to 20% more power in solar fields and do not suffer from the light-induced degradation like p-type cells. This technology represents much progress for the industry in that it conclusively yields higher cell efficiency at an increasingly competitive price. As this high-efficiency technology uses several steps that require the Amtech product, this results in more than doubling the potential revenue for Amtech compared to the standard p-type multi-lines. Nexolon order also validates that Amtech and its partners are leading the way to bring next-generation solar solutions to the marketplace. We announced today that we entered into a contract to place our ion implant system and the IonSolar at ECN, that's the Energy Research Centre of The Netherlands. The system will be used for the high-efficiency cell technology research and development. The IonSolar was developed and built at Kingstone Semiconductor, a majority-owned subsidiary of Amtech. Through Tempress, we have a long relationship with ECN and having the IonSolar at ECN, together with the Tempress diffusion and deposition equipment, allows us to have an additional tool that can be used in the development of the high-efficiency cell technology. During the downturn, we have continued to invest in our R&D and believe that we now have the right technology and products at the right time available to the solar market, which, at this point, is showing good signs of improvement. Now let me take a minute and talk about the other markets we serve. We have started to see a recovery in the semiconductor market and expect this segment of our business to improve over the 2013 levels. As in the LED and sapphire market, we continue to see strong demand for our template and carrier products, which are used in the lapping and polishing of sapphire and silicon carbide wafers. A potential exciting growth opportunity is the expanded use of the sapphire in mobile devices, which could result in more consumption of sapphire wafers. Brad will now discuss the fourth quarter and full fiscal year 2013 results with you. Brad?

Thank you, Fokko. Net revenue for the fourth quarter of fiscal 2013 was $6.9 million compared to $10.4 million in the previous quarter and $10.9 million in the fourth quarter of fiscal 2012. The low revenues reflecting lower shipments across all segments of our business. Total customer orders in the fourth quarter of fiscal 2013 were $8.4 million. At September 30, 2013, our order backlog was $26.8 million, up 8% compared to total backlog of $24.8 million at June 30. Total backlog at September 30 includes solar backlog of approximately $17.1 million. Foreign exchange caused a $600,000 increase in backlog in the September quarter. Just as a reminder, backlog includes deferred revenue and customer orders that are expected to shift within the next 12 months. Gross margin in the fourth quarter fiscal 2013 was 46%, primarily reflecting a high percentage of net revenue, resulting from recognition of previously deferred revenues. In the prior quarter and in the fourth quarter of fiscal 2012, gross margin was negative due primarily to significant inventory write-downs. Our SG&A expenses in the fourth quarter of fiscal 2013 were $3.2 million compared to $5.4 million in the preceding quarter, a 41% reduction, which is due in part to lower stock compensation expense. In the June quarter, stock compensation expense was higher due to the acceleration of vesting and voluntary cancellation of certain stock options. Additionally, the latest quarter reflects cost reductions resulting from corporate-wide cost-control initiatives, as well as lower commissions and shipping costs related to lower revenues. Our research and development expense was $1.5 million in the fourth quarter compared to $1.9 million in the preceding quarter. Expenses were lower primarily due to ongoing cost control on our solar R&D projects. Depreciation and amortization in the fourth quarter of fiscal 2013 was $700,000 compared to $600,000 in the third quarter of 2013. Included in the fourth quarter of fiscal 2013 results is $159,000 of stock option expense compared to $422,000 in the fiscal fourth quarter a year ago and $1.6 million in the third quarter of 2013. Tax expense for fiscal 2013 was $1.9 million. We incurred a tax expense for the year due primarily to establishing a valuation allowance on deferred tax assets related to net operating losses incurred in The Netherlands. Net loss for the fourth quarter of fiscal 2013 was $1.7 million or $0.18 per share. Net loss was $12.1 million or $1.27 per share the preceding quarter. The net loss was $14.1 million or $1.49 per share in the fourth quarter a year ago. Total revenue by geographic region and for the fiscal fourth quarter was: the Asia-Pacific region at 66%, Europe at 15% and North America at 19%. As Fokko mentioned earlier, we have built most of the equipment for the Nexolon order, which includes our advanced solar diffusion systems and our PECVD systems. For accounting purposes, the PECVD system is considered new technology and therefore, the revenue and cost of the PECVD systems will be deferred until customer acceptance, which could come in the September quarter. Our financial position remains strong with essentially no debt and total unrestricted cash and cash equivalents of $37.2 million compared to $46.7 million at September 30, 2012. At September 30, 2013, we had working capital of approximately $42.9 million. We continue to execute our financial management strategies to maintain our solid financial position. This concludes the prepared remarks section of our conference call. Operator, please open the call to questions.

[Operator Instructions] And our first question today comes from Mark Miller of Noble Financial Capital Markets.

I was just wondering if there were any solar revenues in the September quarter.

The September quarter, there were, but they were very low.

Okay. And how did cash flow from operations during the quarter?

The -- if you look at overall our cash balance from quarter-to-quarter, we're down just a little bit but we continue to manage that very closely.

Okay. There has been conflicting things out of China a month or so ago. Chinese government was talking about consolidating some of the solar cell manufacturing in the country. But then their projections were fairly significant for solar installations in China. I'm just wondering, can you give us some color on what you feel is going on in China right now? You said there is increasing activity. I assume that's in China also. But there seems to be some conflicting information from the government.

Yes, Fokko here. First of all, we do see some consolidations already and -- with Suntech and something going together and that is something that probably will continue also in other areas. So yes, there is some consolidation but that is not everywhere. And of course, China is not the only market we serve. There is more places in Asia, and Taiwan is even a bit more active these days. And like J.S. mentioned, it's becoming global. So it's -- there are more places where there is activity. But yes, indeed, in China, they are struggling with the overcapacity and with the growth in demand and obviously, equilibrium comes closer by. So that will take a little bit more time, but that does not stop everybody from being active.

And finally, Innovec has entered the ion implant market also. I was just wondering if -- and they announced they had registered their first order for an ion implanter. Any color on that also in terms of -- did you compete for that? Or what do you feel contributed to Innovec getting that order?

I have not that much information about what the competitor exactly does here. What I can say is that, especially for us, it's important that our implanter now is the source of many new technology developments. We've seen over many years that ECN is very good in bringing new technologies to market. And those who have been working with them with new equipment, with new technology, there is a good chance that, that goes into their next technology. And so for us, that's a very important factor, especially as it -- all the other Amtech, Tempress equipment is in that same R&D lab, that it means then you can tune all of those together and come up with a good flow and with a good process at a good cost. And some competitors have machines at customers but -- and of course, it's an advantage. But we believe for the longer term, this is a very important step to have this machine at this specific space.

[Operator Instructions] And our next question is from Gordon Johnson of Axiom Capital.

So I guess, in China, there's been some issues, I guess, associated with their targets for utility scale and, I guess, distributed solar. And what we've seen is that there's been limited monies given and in fact, a lot of these companies have been paying debts back with respect to expansion of capacity. So you guys talked about increased activity there. And I guess, piggybacking on the last question, is there any way you can give us a little more detail into activity there? And then also, it seems like Taiwan has clearly a lot of demand for cell capacity via tolling in Taiwan into the United States. Is there any opportunities for you guys there? And then I have a follow-up.

First -- let's first start with Taiwan. There is always opportunities for us there like in other places. And when there is more activity in Taiwan, it's a little bit in time ahead of China, so yes there are opportunities and we hope they will mature. Still work to be done there. And as of China, yes, there is talk about its utility scale and distributed. There's a lot of talk about China and it's more people talking about what they think is going to happen than exactly you really know how the Chinese government actually is going to do it, so that almost changes from week to week the comments that you read in the news. So I'm not so very concerned that they will not look into problems they have with the environment. They will be forced to do this. And then with China, if they say they have a target and they will generally meet it, so I'm not too much concerned about it. On the other side, they do have a little bit of time now. There is still capacity that can be -- sales can be bought at the Tier 2s and 3s, so I think the timing is not a matter of just a few weeks or a month or 2. It's a little bit further out. But the present situation gives the Chinese major cell producers sufficient time to make good choices rather than to rushing into a very quick expansion and then having no time to find the right technology. So I believe that China will be doing quite a bit also in some increasing capacity but not necessarily the standard products, so that's also where you see our remarks on activity and cell technology of higher efficiency that has to be, as we all know, above 24. But the mono is above 18 for the multis, and they need a little bit of time to make sure they do the right choice. But there's a lot of activity, particularly in that area.

Okay. That's very helpful, Fokko. And then, when I look at your customer deposits on the liability side, I noticed a pretty significant pickup there. How should one read that?

Yes. I think -- as we said in our, I think, our Q3 earnings call, we did get a deposit or a sizable deposit during the quarter.

Okay. And you guys have this business with Nexolon. It seems like it's going to be something that we should expect to contribute clearly in the fiscal 2014. Is there any way we should think about that business coming in? And maybe if you can give us a little clarity or maybe a little guidance, if you could, on how we should think about gross margins going forward. Because clearly, there was significant upside on the gross margin side and clearly, on the operating margin side. So should we think about these levels being the levels we should think about going forward? And then on the revenue side, should we think about an improvement in revenues associated with Nexolon order? Or are we waiting until the second half when China starts to pick up?

Yes. Gordon, as it relates to gross margin, I think one of the things we highlighted was even if we had relatively low revenues, but yet we had a very high margin. Again, that's primarily due to the, what we call, the deferred revenue. That is our deferred profit that sits on our books, that when we get customer acceptances, we then recognize that. That's usually at a very high profit margin. And we had, as it related to regular type of revenue shipments, its proportion was greater and, therefore, had a greater impact at the margin. Unfortunately, this business can be lumpy from quarter-to-quarter and that is what happens. So looking forward from a margin standpoint, we think, generally, we should see some relatively improved margins as the volume picks up. That's just -- and we saw that back in 2011 -- '10 or '11, when margins -- when volume improves, so did margins. As we're down at these lower levels, though, we are highly impacted by the revenue mix, where there's previously deferred revenue. Or when we do, do shipments, we are going to be deferring some revenues. So giving a little bit color going in 2014, Nexolon obviously is going to help. But as you can see from the backlog, there's more orders that need to come in, in order for it to be a better year and show improvements. But as in our commentary that we gave, our expectations are that we'll start to see that, especially in the second half of 2014.

And our next question is from Jeff Osborne of Stifel. Jeffrey D. Osborne - Stifel, Nicolaus & Co., Inc., Research Division: Just a couple of questions, following up on Gordon's. The deferred side, Brad, can you comment on how much of revenue flowed through from deferred this quarter? And kind of what the true margin profile, the largely semiconductor revenue mix was?

Yes. The amount was relative to the total, which was a little under $7 million, was a higher percentage than normal. But we didn't break it out, but it was a larger percentage. So therefore, you -- that's why you see most of that higher margin. And then the rest of the business, semiconductor/, call it, LED optics business that we have with PR Hoffman, played a significant role in improving the margins. So that has to do with -- our semiconductor business would be a little bit lower in margin than what you saw on a consolidated basis. Jeffrey D. Osborne - Stifel, Nicolaus & Co., Inc., Research Division: Okay. If you can answer it from that perspective, is there a way you can tell us how much deferred profit that's at the high margin is left on the books to flow through in the next couple of quarters?

Yes. Jeffrey D. Osborne - Stifel, Nicolaus & Co., Inc., Research Division: I think it's about $3 million. But I just want to make sure it's the right number.

Yes, yes, it's $3 million. Jeffrey D. Osborne - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then on the OpEx side, a lot of moving pieces on stock-based comp. But how should we think about the true run rate of that as we enter calendar '14?

Yes. We said for the quarter, it was about $160,000 a quarter. Jeffrey D. Osborne - Stifel, Nicolaus & Co., Inc., Research Division: For operating expenses?

No -- yes, I wish. But no, on the stock comp expense. Jeffrey D. Osborne - Stifel, Nicolaus & Co., Inc., Research Division: On the stock comp, yes, but just with the true -- excluding stock comps, now with the changes and accelerated vesting schedule, et cetera, that you did last quarter, how do we think about the true run rate of operating expenses on the R&D and SG&A outside of stock-based comp?

Yes. We haven't given any specific guidance as it relates to each of those line items. Trying to -- looking at the R&D will depend on what our building activity is. Again, at Kingstone, where a lot of R&D occurs, we have tools that have not yet been accepted at customers. So we are still a development phase company, so there's a lot of expenses hitting there. That should continue on pretty reasonably consistent with what we've just seen. As it relates to Tempress, for most of our other R&D, should continue to see kind of a similar run rate. SG&A will be highly influenced by, on the S side, as it relates to shipments and commissions related to shipments. So that's about as much color I can give as to the SG&A. Jeffrey D. Osborne - Stifel, Nicolaus & Co., Inc., Research Division: On -- as it relates to the Nexolon contract, I heard you on the PECVD side that, that might take until September to get acceptance because of the new product. But can you just talk about the diffusion side? You mentioned that those are already largely built. I imagine you're starting to ship those now. Should we think about those coming in over the next couple of months? Or is there a lag in that product line as well?

No, I think that's -- that should -- that's a reasonable expectation over the next coming months. And again, accounting for those our normal accounting treatment, we record the revenue at shipment except for the pullback for acceptances. Jeffrey D. Osborne - Stifel, Nicolaus & Co., Inc., Research Division: Got you. Just a couple of other quick ones here, on the ion implant side, to my recollection, you had shipped 2 before. I believe your 10-Q or K states that you need to ship 3 units to record revenue to that -- what you just mentioned previously about waiting for acceptance on those. So as the ECN unit is shipped, I imagine that would be around mid-'14. Would you then have 100% margin catch-up revenue recognition on the 2 previously shipped units? Or how do we think about the timing of that? Is it 100% margin?

Yes. On the -- the revenue recognition is, you need -- we need to get acceptance from 2 -- on 2 similar systems with similar -- that are similarly configured for customers, and therefore, the third one. But to your point, the cost related to the build of those systems have been expensed. So at the point in time where there is customer acceptance of the ion implant tools, we'll be able to record those as revenue with probably very little cost. Having said that, we're not really giving any expectation as to timing of when that will happen, just to be clear. Jeffrey D. Osborne - Stifel, Nicolaus & Co., Inc., Research Division: Okay. Last question is just, is there any -- with all the new products and things kind of moving around here, is there any CapEx needs for the company next year? Or how do we think about your cash flow needs? Is it all driven by the P&L? Or is there any large expenditure items that might be incurred?

Yes. As far as the CapEx plans are concerned, there are not any significant expenditures for production equipment or anything else that we can see right now.

[Operator Instructions] I'm showing no additional questions. I would like to turn the conference back over to Brad Anderson for any closing remarks.

Thank you. We appreciate everyone for joining us on this conference call and look forward to reporting on our future results. Thank you.

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