Amtech Systems, Inc. (ASYS) Q3 2015 Earnings Report, Transcript and Summary

Welcome to the Amtech Systems’ fiscal 2015 Third 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 call is being recorded. I would now like to turn the conference over to Mr. 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 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 third quarter 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 Executive 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. So I’ll 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 highlighted in our press release earlier today. We are pleased with notable progress points in Q3 with the respect that recognized value of our technologies in the marketplace. As always we look forward to continuing to next months our new and long-term opportunities and our objectives are consistent in that we intend to continue with events our technologies, still upon our strategic and operational strength depends our relations with 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 partner for our customers in the next spending cycle. Although the solar equipments 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 integration over BTU has gone well. Furthermore, we’re confident that the acquisition of SoLayTec has enhanced our 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 the 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 an 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. And 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 more diverse and compelling product mix. Our long-standing and new customer recognizes 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, higher efficiency cell and module solutions. We do see a significant number of our customers planning for increased capacity 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 business with world-wide, non-exclusive, selling rights and minority interest in Kingstone. The transaction is subject to customary closing conditions and regulatory approvals in both Shanghai and Hong Kong. Now I’d like to provide you with an update on BTU and our integration process. Integration in 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 had a tail-end of the calendar of 2014 expanded our technology portfolio with state-of-the-art technology for high efficient solar cells including PERC. SoLayTec’s atomic layer deposition tool is a key component. In this quarter we were pleased to report that we received a repeat order for our production ALD tool. Our LED business continues to contribute in its modest growth, but stable business and a nice contributor with respect to our goal to have diversified mixed revenues. And now Brad will go over the third quarter financial results. Brad?

Thank you, Fokko. At June 30, 2015 our solar – our total backlog was $46.9 million this compares to total backlog of $56 million at 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 U.S. 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 and 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 BTU revenues since January 30 of 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 increased results primarily from inclusion of BTU's SG&A for a full compared to the same quarter in 2014 the increase results primarily again from inclusion of BTU's SG&A since January 30 of 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 a year ago. The sequential increase in RD&E expense was 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, 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 increase is due to certain intangible assets becoming fully amortized. The increase compared to the same quarter year ago again is primarily due to the acquisitions of BTU and SoLayTec. Included in the third quarter of 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 in the second quarter of fiscal 2015, and approximately $1.3 million in the third quarter of fiscal 2014. 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 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. The net loss for the third quarter a year ago was $5.3 million or $0.53 per share. Total revenue by geographic region for the fiscal third quarter was, for the North American region at 27%, Asia-Pacific at 59% and Europe at 14%. Our financial position remained 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 the tax payments of $4.8 million and investments and 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 one 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 mid-to-high-20% range, with operating margin negative due primarily to higher RD&E expense resulting from lower government grand recognition. Operating results could be impacted by the timing of system shipment 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 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 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] And our first question comes from Sven Eenmaa of Stifel. Please go ahead.

Hi, thanks for taking my question. First, I wanted to ask regarding your commentary on your customers capacity expansion plans going into over the next 12 months. So I think you saw in the positive in that front what is the expected timing here of initial quoting activity versus moving to the order stage do you see the order you mentioned lasting through end of this year is it 2016 improvement project there how should we think about this?

Sven this is Fokko here. That’s always little flexible we are not talking to lot of customers and explain to as they are plan and we quoting for that. Some projects are in earlier stage so somewhat little bit more develops, some need some permits may be in countries not China and so it’s a little bit of mix but over the last months or so the activity and plans that we are being involved in it get more and more. And in some countries even though you are working on projects and they seem to be close – like in India sometimes it takes a little longer, but it’s a right mix but over the amount of projects that are ongoing and it is certainly come to the large compared to the whether its 4, 5 gigawatt of projects that now being executed with orders already been done, most of those where outside of China. So there is good activity at a moment. Yes.

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

Well, I do a first and Brad a bit more. We originally of course come from the semi industry and now for the last years it was solar only and that was much so much more semi and yes down turn and semi was a little bit on expected for us its standard in this industry that it goes ups and downs. The mix it will last few quarters I think, but the mix for the future Brad maybe you have some ideas on that.

Sure, sure. Obviously, we’re heavier at 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 a with semi picking up as far as 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 wanted to ask regarding that Kingstone deal what is the expectation there in terms of your – 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 and once the transaction is completed and finalized we would expect to see a reduction in our R&D.

Could you quantify that?

Not, at this time.

Okay, thanks so much.

Okay, thank you.

And our next question comes from Jeff Osborne of Cohen. Please go ahead.

Yes, thanks for taking the question. Just a couple, Brad you mentioned that R&D would be up in September quarter just due to lack of government’s grants. Is there a way you can quantify that?

Sure. Well, in our 10-Q we disclosed how much we've actually recognized and I believe is about $2.3 million in the June quarter as 85,000 higher than that but $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's left to be. So call it, that we don’t see it being higher than say $500,000 - $2 million

Just to make sure I understand you right, it sounds like your reported GAAP; OpEx number for R&D will be closer to $2 million - $500,000 higher than the current run rate?

Actually probably a million and a half 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 since the Kingstone is still part of Amtech through September 30.

Okay.

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

– : 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 listening on as well as if you can kind of rank order the interest level 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, Jeff. The first one BTU, yes it is the packaging both to normal reflow, the soldering of printed circuit boards and also that 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 change over the last, beginning of this year and semiconductor industry really forecasting lower numbers. And of course last year was pretty good, so there was quite of bit of production capacity for printed circuit board soldering, reflow soldering on last year. So that also did not held for this year because then last year was a little bit much and this year everything is down. It's pretty much for everybody and maybe the very, very front-end the ASML 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 pass for reflow soldering for printed circuit boards. Now to solar, last one is it for one product while diffusion continues to be our number one product so yes, that's the maturity, but the interest in ALD, SoLayTec combined with PECVD is an important one to because that’s the new market and a lot of the new projects will at least have the capability for being able to run PERC. And PERC has taken off quite strong and a little bit later part of that cycle because our ALD tool, we just got in faults just half year ago, but that is where a large portion has run and with PECVD which now approved in quite a few customers that is a very reliable tools, very good tools. But again the diffusion remains to be at the largest. And now it's only the Tier 1 or also some of the Tier 2, yes we also see more activity in Tier 2. If you look back I say a quarter not even bit more with procurement of equipment for the lines they were built outside of China they are pleased with the Tier 1 because for Tier 2 is to go outside China that does not – they couldn’t do that. So we see now the combination that of course Tier 1 is most predominant, but also Tier 2 are starting to look into increase in capacity and bit if a mix, we set end type, yes more are looking into end type as the technology buy from us, but we happen to have nice set of equipment where you can really do the end types so that we do have a very good position and PERC is of course still an important one. So – but it’s a mix for all the equipment.

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

Excellent. I assume that was the case, just wanted to double check with the weakness this quarter. Appreciate the details.

And our next question comes from Mark Miller of Benchmark Company. Please go ahead.

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

This is tough one, Mark, but I think it’s significantly more than the last round I don’t want to say if I pick the numbers double.

Okay, that’s encouraging. Just wondering I was little surprised by this tax payment of $4.8 million, can you give us some more colorable boost over that?

Sure Mark, it relates to several years ago when we are profitable there was a refund received in one country the Netherlands which resulted in a reduction in foreign tax credits in the U.S. So we’ve been disclosing in our MD&A liquidity capital resources that commitment and then that we have to make that payments over the last couple of years. We basically pushed off that payment as long as we could and we had to make that payment this quarter so that's really related to prior earnings from several years ago is what relates to so nothing new or nothing to really be forecasting going forward. It really was more of a one-time investment.

And the other drop – the other part of the drop in cash you said it was R&D, but also operational I’m just wondering total terms of your new acquisition SoLayTec and also BTU. How much trained where they in terms of operational cash spring?

Yes, BTUs we gone through plan restructuring we did modestly little bit more here in July there really not a drain much of a drain. SoLayTec is development there also have existing product, but there is development cost associated with. So you see cash negative position currently but that was plan and assume that we would they would in that kind of position least early on and I would say develop and secure there marketplace replacing the PERC market it has been shown to start to turn positive with this recent repeat order for their atomic [indiscernible] tool for Tier 1 customer for their PERC process.

Whether would be fair to say in terms of the cash during from the legacy your legacy Amtech operations was it sizable was it large than the cash during from legacy impact or same size this is wondering.

Yes, it was fairly equal across cross division this quarter.

And just one final question I guess you thought some investors by surprise understand now just looking at this tax payment other things the sale Kingstone but did any – was there anything beyond cash in terms of development of the solar of the implant market is that – you feel that’s developing as expect at developing more slowly that opportunity overall for the whole industry.

I will try first Fokko and you can time in if you want to, but market relates Ion implant I think little bit history is important here we did this acquisition made this investment back in 2011 and there was another very large company that was aggressive good into that solar market. As that – as the products the mature its now up to become production where the tools and looking at the impact on the markets in that gain two technical primarily the market and so were people looking at was p-type Mono market for this product. It was really was it making enough of a different in efficiency to make the cost of ownership work and then you have the event of additional improvements and p multi wafers, based related to that improvement efficiencies. In the market for p Mono really is very small. So that market opportunity that look like as much bigger at that time smaller. In addition the market for say n-type or other more complex cell structures has developed, but not develop say as quickly as everyone in the entire industry not just of us but entire industry that was going to happen and there was an opportunity to monetize some of our R&D investment, get that opportunity that often and so there was an opportunity for us and where right in the middle of trying to execute that still maintain some business interest this is future of it.

Thank you.

Our next question comes from Aaron Martin of AIGH Investment Partners. Please go ahead.

Hi, it’s Aaron Martin for me at AIGH. Congratulations on the high number of shipments this quarter. When I look at your guidance and then look the shipments of this quarter. Are you expecting to not I am 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 that you haven’t recognized any revenue from Kingstone. Is that correct?

That’s correct.

Okay and you talked about that those close the R&D expense will go down, what has the Kingstone R&D level been like you know on a quarterly level that you have been [indiscernible] P&L?

Yes, it is fluctuated because part of that timing of when we recognize the government grant funding which we done but on an going basis they probably have been anywhere from paid on level of projects that are working on $500 million to over little over $1 million a quarter.

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

Yes, on the order that we are reporting the full order because we are pushed through both the revenue and the expense through the P&L but then we back out our minority, back out to minority interest on the bottom line. But in our backlog the orders we report is 100%.

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

Expectation is the September quarter, as far as is fairly close to what our revenue guidance is.

Okay and with revenue coming like quarter-over-quarter is there should 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 not – it’s just the timing of shipments though it's a matter of looking at backlog getting an idea what we think, we’re going to book and ship during the quarter. So I think that both those factors play in.

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

That 400 megawatt that was related to I believe some for on furnaces. So that would've been in backlog, I believe in well, obviously is in backlog as of the end of June. Some of that might have shipped already?

Okay, thank you very much.

Thank you, Aaron.

[Operator Instructions] Our next question comes from Gordon Johnson of Wolfe Research. Please go ahead.

Hey, guys this is James Bardowski in for Gordon.

Hello, James.

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 deferred income taxes. Is it safe to say that it relates to the U.S., Netherlands issue that you are discussing before and do we expect that to repeat?

To answer the first question is 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 spoke off earlier, the refund received a year or so ago from the Netherlands reduced our foreign tax credit that we can recognize in the U.S. require - caused that U.S. tax payment going back several years ago to profitable year. We don't see that as a recurring issue at all.

Okay, great. I guess and secondly one of the things that I really pointed to as a benefit to Amtech Systems was you resolve to remain debt free or at least no debt it looks like you had about half a million this past quarter, is there any shift in the capital structure that you guys are targeting, what’s behind that?

Not any shift let me just give a little color behind that, obviously there is 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 are referring to relates to SoLayTec. SoLayTec in the development company, we acquired 51% ownership at the end of December. Part of their financing is through some debt that debt 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.

Okay, that’s fair.

No real fundamental shift in any – and how we view and manage our capital structure.

Okay, excellent. And then I guess also the last time we spoke you mentioned whether 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 are 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 are 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 revenues are EUR as well as what percentage of the production cost?

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

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

Yes, costs are pretty much inline and match with the revenues so we’ve got revenues in euros, but typically have costs in euros and if we have revenues in dollars we typically have constant dollars.

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

We love to see a 100%, but…

Indeed.

Okay, I don’t have a specific percentage that we’ve talked about in here, but we're obviously below are optimal level, optimal levels going to be more than 90% plus so there is opportunities to further leverage the operating model as the semiconductor, SMT impacts semi packaging markets come back to the strength that – 2014.

Okay, that’s all from me. I’ll turn it back. Thank you very much, guys.

Thanks James. End of Q&A

This concludes our question-and-answer session. I’d 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 will conclude today's call.