Amtech Systems, Inc. (ASYS) Q2 2015 Earnings Report, Transcript and Summary

Good afternoon and welcome to the Amtech Systems fiscal 2015 second quarter results conference call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Brad Anderson, Amtech's Chief Financial Officer. Please go ahead.

Good afternoon and thank you for joining us for Amtech Systems' fiscal year 2015 second quarter 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 second quarter fiscal 2015 ending March 31. 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 Executive Chairman will start our discussion today. Fokko Pentinga, our President and Chief Executive Officer will update you on progress made in our fiscal second quarter and I will then discuss first quarter financial results and outlook. So I will now turn the call over to J.S. Whang, our Executive Chairman, to begin the discussion. J.S.?

Thank you, Brad. Thank you for joining us today as we discuss Amtech's Q2 fiscal 2015 financial results, our market opportunities and our progress within. We have a long history of growing our capabilities through acquisition of value adding product, technologies and talent. Early in this quarter, we closed on the acquisition of BTU bringing to us those same strengths. Prior to the BTU close, at the end of December, we completed the acquisition of a majority interest in SoLayTec further enhancing our solar technology solutions portfolio. Our growing organization is well underway to address the ever evolving technology needs of both our long-standing and newer customers. We have solid technology platforms that position us very well to capitalize on opportunities in the solar, semi and LED markets. We are diligently focused always building on our already industry leading capabilities and energize as we pursue profitable growth, for all of our stakeholders. Our teams from Tempress Systems, R2D Automation, Kingstone Semiconductor, SoLayTec and BTU International just last week exhibited at the 9th international solar trade and conference in Shanghai, China. We had opportunity to speak with current and potential customers regarding their capacity expansion plans and we look forward to furthering those discussions as we move through the rest of this year. Fokko will now discuss what is happening in the market overall, more specifically in our solar, semi and LED business and further detail the point of the discussions with the customers at the Shanghai conference. Fokko?

Thank you, J.S. and let me add to J.S., his comment regarding the enthusiasm and we have with BTU and surely with that teams and capabilities onboard and as we jointly move forward to capitalizing our market opportunity. Integration of those companies continues to progress as planned. BTU performed in line with expectation in our first quarter of ownership, considering the current softness in the capital spending in the semiconductor products industry and March quarter, historically, being slow. Regarding SoLayTec and the acquisition of the majority interest in the company at the end of December, the integration process gone as planned and we have already started to capitalize on joint sales opportunity. Our combined technology and product portfolio are important steps in our customers' objective to increase solar cell efficiency at a lower cost of ownership. We have a solid platform to successfully participate in the upcoming PERC and n-type markets and accelerate the growth of our company. We continue to see progress in the global solar market. And I am happy to report that the tone of the market has changed considerably from this time last year when solar companies in Asia were quite uncertain about timing of the best [indiscernible] and upgrade. Now we are seeing a much higher level of confidence in the market and our discussions with customers are less on the challenge of there isn't sanctions, but instead on strategies to overcome this challenge. Last week at the Shanghai solar exhibition, the tone was very positive and we held many meetings with stock brokers. It is a very positive change. It further validates our assumption regarding the high potential for improving global demand in 2015 and 2016. Our customers are going forward with solid plans to add capacity both inside and outside China. Some of these expansions are already underway. Factories are going up in Thailand and Malaysia and other regions positioning production to mitigate the pressures caused by U.S. and Europe tariff sanction. We expect that over the coming quarters, more manufacturers will be deciding where to put their next factory to best position the company to sell it to the global marketplace. Importantly, we see such expansions and the higher levels of competence in the marketplace to transition in new orders for us. Solar is without a doubt a long term energy solution. Global warming, pollution and political agendas are driving the need for cost appropriate alternative energies around the globe. Today on going forward, we expect even higher levels of focus on clean energy and solar as the long term technology solution. Our semi and electronics business continued to perform well. While there is current softness in CapEx spending, we believe our market position remains healthy and we expect to see an uptick in revenues in the second half of 2015. Our LED business is doing well. It is a modest growth business and we expect a continuation of that in this fiscal year. And now, Brad will go over our second quarter financial results. Brad?

Thank you, Fokko. At March 31, 2015, our order backlog was $56 million, the highest it has been in three years. This compares to total backlog of $48 million at December 31, 2014. Our total backlog at March 31, 2015 includes $41 million in solar orders and deferred revenue compared to solar backlog of $38 million at December 31, 2014. Foreign exchange caused a $4 million decrease in our backlog in the December quarter due to the weakening of the Euro versus the U.S. dollar. 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 second quarter of fiscal 2015 were $31 million of which $16 million were solar. This compares to $30 million in the preceding quarter of which $21 million were solar. In the second quarter of fiscal 2014, orders totaled $22 million including $14 million of solar. Net revenue for the second quarter of fiscal 2015 was $24.3 million compared to $12.4 million in the preceding quarter and $12.7 million in the second quarter of fiscal 2014. The increase is due primarily to higher solar revenues and the inclusion of BTU revenues since January 30, 2015. Gross margin in the second quarter of fiscal 2015 was 28% compared to 28% in the preceding quarter and 23% in the second quarter of fiscal 2014. The higher margin compared to a year ago resulted primarily from the acquisition of BTU and higher volumes in our other semiconductor business. Selling, general and administrative expenses in the second quarter of fiscal 2015 were $8.1 million compared to $6.4 million in the preceding quarter and $5.3 million in the second quarter of fiscal 2014. The increase results primarily from inclusion of BTU's SG&A for two months in the quarter and acquisition related expenses. Partially offsetting the increase is a decrease in our bad debt expense. Research, development and engineering expense was $800,000 in the second quarter of fiscal 2015 compared to $1.8 million in the preceding quarter and $2.2 million in the second quarter of fiscal 2014. The lower RD&E expense was primarily due to an increase in the recognition of government grant funding, partially offset by increases in spending related to the acquisition of BTU and SoLayTec. Depreciation and amortization in the second quarter of fiscal 2015 was $937,000, compared to $705,000 in the preceding quarter and $583,000 in the second quarter of fiscal 2014. This increase is primarily due to the acquisitions we previously mentioned. Included in the second quarter of fiscal 2015 results is $336,000 of stock option expense, compared to $232,000 in the preceding quarter and $200,000 in the fiscal quarter a year ago. Income tax expense in the second quarter of fiscal 2015 was $170,000, compared to $180,000 in the first quarter of fiscal 2015, approximately zero in the second quarter a year ago. Despite the pretax loss for 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 second quarter of fiscal 2015 was $2.3 million, or $0.19 per share, compared to a net loss of $5.2 million or $0.53 per share in the preceding quarter. The net loss for the second quarter a year ago was $3.8 million or $0.39 per share. Total revenue by geographic region for the fiscal second quarter was, for the North American region 18%, Asia-Pacific at 68% and Europe at 14%. Our financial position remained strong with total unrestricted cash and cash equivalents of $32.6 million, compared to $28.6 million at December 31, 2014. At March 31, 2015, we had working capital of approximately $42.6 million. Now let me turn to our outlook. We expect revenues for the quarter ending June 30, 2015 to be in the range of $33 million to $35 million. Gross margin for the quarter ending June 30, 2015 is expected to be in high-20% range. Normally we would expect to see a higher margin, but due to the expected ramp up of shipments in the quarter, we expect higher revenue deferrals which lower the gross margin. We expect our operating margin will be slightly negative. As a reminder, operating results could be impacted by the timing of system shipments, the net impact of revenue deferral on those shipments and the recognition of revenue based on customer acceptances, all of which 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, particularly 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 United States dollar and the Euro. A significant decrease in the value of the Euro in relation to the United States dollar could cause actual results to be lower than anticipated. This concludes the prepared remarks portion of our conference call. Operator, please open the call to questions.

[Operator Instructions]. And our first question will come from Sven Eenmaa of Stifel.

Respect you all taking my questions and I apologize if you have answered that already, but I wanted to clarify, now that we are seeing strong growth rates in China on the solar side and there is an LED trends, which are expected to cause potentially the tightening of supply conditions in the later part of the year, how do you guys think about the equipment order trends in solar as we go through this calendar year?

Well, historically orders have been lumpy. It depends on the customer and the timing of the execution of their plans. As we mentioned on the call in our prepared remarks that the activity at the solar show in Shanghai was upbeat. There was lot of discussions. Some come to an order quicker than others. We had an uptick in the December quarter, it was slightly down in the March quarter, but the opportunities continue to be there. So I think we continue to be upbeat about potential for orders but the actual execution of those orders depends on a lot of things and is customer specific.

Well, that's very helpful. And the second question I had was on the deferrals front of what you mentioned. How should we think about, especially the deferrals impact in the coming quarter, but when would you expect to see it in the related reversals on margin impact?

Yes, it's a great question. Depending on when those ship. Sometimes they ship at the beginning of a quarter, we are able pick those up within a quarter, but sometimes those carry over. So we would expect most of whatever's deferred in the June quarter to be picked up in the September quarter.

All right. Got it. And the last question I have is, I heard the commentary on the semi side and I guess the equipment side and then the expectations for improvement in the second half of the year. Has that business improved? Is it fair to assume that that will clearly move your gross margin percentage above 30%?

It has that potential to do that.

Got it. Thanks very much.

Thank you.

[Operator Instructions]. Our next question comes from Jeff Osborne of Cowen & Co.

Great. Good afternoon. Just a couple of questions from me. I was wondering if you can give us a sense of what the BTU related revenue was for the two months that you had them, just so we can get a sense of organic growth for the company?

We had two months of BTU and typically that's a low quarter for them. So we don't have, I think, a specific break out. If you look, done by orders or revenues?

I was talking about revenue actually.

Yes.

I am looking at your 10-Q is out, you have got $12.088 million in semiconductor revenue. How much of --?

Right. And that consists of both BTU and Bruce Technologies.

Okay. Any sense on how much of it is BTU? 60%, 70%?

Yes. That's probably within the range.

Okay. That's helpful. And also on the run rate, in particular for R&D, but can you give us a sense for the June and September quarters? I am just trying to get a sense of how much synergies there are between different locations and integration issues and challenges and opportunities? But in particular for R&D was very low because of the credits that you mentioned, Brad. How should we think about what a true run rate is for OpEx for both SG&A and R&D, now that you are fully up and running the June and September quarters?

Sure. Let's start with the RD&E. RD&E, we do break it out in the footnotes to our 10-Q, how much was the actual spend versus what we received and --

I haven't got to that page yet. I just came up. So apologies.

That's okay. But I think in the footnotes and in MD&A, but page 27 on the 10-Q, but still for the quarter, the gross amount was $3.5 million and we recognize $2.8 million of grants to offset that.

But that was only two months of BTU, so probably closer to $4 million, low $4 million run rate?

Yes, probably in that range.

Okay.

On SG&A, it's really the driver of that and the increase is the selling side of G&A. So I would look to as revenues increase, there is some variable portion of that related to commissions. So we start to see that ramp up more, G&A will not but the S part of SG&A will ramp up.

Got you. And given it's been a while since we have an order cycle, can you just remind us, do you pay commissions on order or upon acceptance?

Well, we accrue the commission upon shipment and acceptance.

Got you. And the last question I had was, just can you talk about, certainly there is a lot of enthusiasm SNEC about that the PERC cycle. Can you talk about A, what would product sets you have developed that can participate in that? But more importantly, as people add lines, what the multiplier effect is? In the past, if somebody spent $1 million on Amtech equipment, what does that actually mean now at the product sets that you have given you have got more than just the diffusion furnace itself? Are you getting $2 million or more than that as people would potentially add a PERC line, if you were to capitalize on that?

Okay. I will take that one. For the PERC line, we have quite a few pieces of equipment and of course you still have the diffusion that doesn't really change, but the aluminum oxide with the ALD machines from SoLayTec is a very important step for the PERC. But at the same time on the backside, on top of the aluminum oxide, we have an extra silicon nitride layer which we also have on the front. So instead of having just the diffusion and let's say for a 100 megawatt for $1 million, now you have added an ALD machine of $1.5 million ballpark and added few PECVDs, well, it would need to be two PECVDs front and back, so all of a sudden it's a multiplier of life over what it would be when it is just diffusion. So that's a big difference. And especially the combination of PECVD and ALD is a very important part of how to make the right work structure.

Thanks, Fokko. I appreciate that. And the last question for me is, you haven't talked about Ion Implant and Kingstone. I mean, clearly that was out its neck as well and PERC seemed to be the talk of the town, but any update on where we stand with the beta units and interest there, other potential customers? Anything? Any thoughts would be helpful.

The development of the technology, the n-type and where you really usefully can have an implanter becomes much more clear where it's being used as an n-type technology. So it's a Mono and it's n-type. And that is still moving relatively slow but we are very confident that that will start ticking up a lot more in the future when particularly the silicone, the n-type Mono prices will become much better. Some companies are working on that and making good progress. So we think that the fact that making an implanter is not all that simple and over the last years, we did I think actually a great job at making a good implanter that is very cost competitive. And so that, of course, takes always a little bit longer than you want, but I am sure, at the moment, we are in a very good position, technically. But for n-type to really take off in high volume, the cost of silicon wafer needs to come down albeit that's really happening in the near future. So that gives us also a lot more potential for Ion Implant technology from gains and grow and as soon as that is happening.

Perfect. Thank you. Appreciate the color.

And our next question will come from Mark Miller of Benchmark.

Just trying to further understand BTU which was just for to two months here. Can you give us any feeling in terms of the bookings? What percent of the bookings came from BTU this quarter?

Yes, probably about a third.

And you said this with traditionally a slow quarter for BTU's bookings?

Yes. Just as a reminder with BTU, a little bit different from a business model. Most of their business is booked and shipped in the quarter. So while they may have pretty good-sized backlog, a lot of it is just the timing. Sometimes we may not have much backlog at the end of a quarter, because a lot of it is booked and shipped in the quarter.

And revenue is recognized upon shipment for most of their products?

Correct.

Just wondering about, they have been burning off some cash fairly aggressively in prior to you acquired them. How did they do in terms of cash? In the [indiscernible], did their cash burn rate go down? I aw some -- you mentioned the synergistic savings were going -- were on target and I am just wondering, in terms of cash burn?

Sure. First of all, before we acquired them, they actually did some restructuring and are continuing through that process. So there was progress made already right at the beginning of the acquisition and it continues to be made. So their cash burn is more in relation to there is working capital needs as revenues ramp up. So they are doing much better than what maybe you have seen on a historical basis, not a standalone basis.

Then finally I was just wondering, the impact of the stronger dollar in terms of sales and profits. How much did that hit you for?

Yes. Just as a reminder and as we said on the prepared remarks, a majority or a lot of our revenues and costs are denominated in Euros. So when you think about Tempress and our European and R2D and SoLayTec, most of those transactions are in Euros, a vast majority of them. So as the Euro decreases in value against the dollar, it tends to shrink the balance sheet and shrink the P&L. We don't have really any significant exposure between, say, revenues in Euros and expenses in dollars or vice versa, but we do disclose that the backlog, the impact on backlog and for the March quarter, there was about $4 million decrease.

And our next question comes from Gordon Johnson of Wolfe Research.

Hi, guys. This is James Bardowski, in for Gordon. Thanks for taking my question. And well done on getting your backlog up. On that note, can you help me understand exactly what drove backlog higher?

What drove the backlog? First of all, we had strong order intake in the December quarter. We did $30 million total, $20 million or so solar. We then had another strong quarter overall from a booking standpoint of $30 million which BTU contributed obviously to that. So it's just I think back-to-back quarters of strong orders really drove the backlog. So our backlog of $56 million, approximately $40 million or so that is solar.

Okay. I know you mentioned that for BTU, it's more of a book and ship business. So do you have any visibility into next quarter as far as where backlog is going to trend?

Obviously it depends on the level of shipments and order intake. So we haven't given any specific guidance for next quarter's backlog.

Okay. And for the expansion, particularly abroad, specifically China, are you seeing competition from Chinese entities such as the 48th Research Institute?

Well, we always see competition from local and that will continue to be, but most of our products are manufactured in Europe at the moment. And on one side, we see the Europe having some effect on our backlog and all, but it also is relatively cheap to buy Euro denominated product. So at this moment, the Amtech product is manufactured in Europe in Euros are quite competitive with local. So I think that really helps us also for our competition to relatively low-cost materials from China, but again that is relatively low cost because now currency has an effect and we also always make sure to be competitive and at this moment it helps us and so always there is competition but we will try to sell within China or when it is going to abroad, but at this moment I think we have a relatively good position there.

So I guess to rephrase and ask it little more directly. Of the expansion that have been announced and are publicly known, I guess what percentage market share you expect to really capture of this?

I think we should be able to keep our market share that we had historically.

Which is?

It was around 35% market, I think, Brad?

Right. On the diffusion side.

Yes.

Okay. Perfect. And then I guess one more question. You mentioned a little bit of a softness in CapEx. What do you see for CapEx as well as depreciation and amort for 2015 and 2016, if you are providing that yet?

Well, the mention of CapEx was really semiconductor CapEx spending. So those are just the market commentary. As far as our cash flow and spending on CapEx, we continue to monitor that very closely and keep that to a minimal level. From a depreciation and amortization, I think when I look at the numbers that we have for this last quarter are pretty consistent going forward.

Okay. And I guess finally for BTU, you did mention that this is their seasonally weak quarter. Is there any bit of a trend that we can go on with respect to how much we can expect BTU's revenue to go up next quarter?

You can go back and look at when they were a publicly traded company, but the June to September quarter is generally were definitely stronger than the March quarter. I don't know if we can put a specific percentage on to it, but definitely meaningful increase.

Okay. Perfect. All right. Thank you very much, gentlemen.

Thank you.

[Operator Instructions]. And we do have a follow-up question from Mark Miller of Benchmark.

You mentioned the impact on R&D this quarter of the credits. And do you expect to see much impact of credits next quarter on R&D?

We don't, but R&D credits, the timing of those recognition, especially in China, are dependent on, for example with the government agencies review of spending and when they come out with reports. So it is heavily dependent but for now we don't see much of an impact in the next quarter.

Okay. Not what you saw this quarter. Thank you.

Right.

I am showing no further questions. I would like to turn the conference back over to management for any closing remarks.

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