Amtech Systems, Inc. (ASYS) Q3 2016 Earnings Report, Transcript and Summary

Good afternoon and welcome to the Amtech Systems Third Quarter Fiscal 2016 Earnings 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'd now like to turn the conference over to Robert Hass, Amtech's Interim Chief Financial Officer. Please go ahead.

Good afternoon and thank you for joining us for Amtech Systems' Fiscal 2016 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, Robert Hass, Amtech's Interim Chief Financial Officer. After the close of trading today, Amtech released its financial results for the third quarter fiscal year 2016 ending June 30, 2016. That earnings release will be posted on the Company's web site at amtechsystems.com. Please note, this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations. We encourage you to review the Safe Harbor statements contained in today's press release and Form 10-Q and risk factors detailed in our Securities and Exchange Commission Filings, including our Form 10-K. I'll now turn the call over to J.S. Whang, our Executive Chairman, to begin the discussion.

Thank you, Robert. Welcome to our discussion today. Thank you all for your interest in Amtech and look forward to sharing with you how global solar markets continue to expand and how Amtech's technologies are recognized as leading-edge solar technology solutions. As I have repeated over time, there is a tremendous global opportunity in solar energy. The recent solar industry articles mentioned many points that describe the current market and which support the expanding demand for solar energy around the world. Solar has become truly global. Here are few points noted in the articles, reflecting the global nature of solar, as well as progress made to the objective of higher solar cell efficiency at a lower total questionable ownership. Those points are: solar demand is expected to grow 43% this year to 73 gigawatt. In the first half over this year, the U.S achieved a record-breaking 1 million solar system installs. Europe achieved 100 gigawatt of solar installations. In the U.K., in last May, solar energy contribution -- contributed more power than coal plants, and solar combined with battery storage is cheap within grid based energy. JA Solar to set up $1 billion solar factory in Vietnam. India sees 40 gigawatt solar power capacity by [technical difficulty]. Emerging markets including more than 20 countries around the world, well each offer more than 2 gigawatt of cumulative demand by 2021. Next year, 2017, solar demand could be lower than in 2016 this year. However, we believe technology wise line upgrades and selective capacity expansion will continue. Solar industries balance of a system cost is expected to go down another 40% by 2020. The continuous improvement in solar cell efficiency and lower total cost of ownership are the industries and our customers objectives and central to what we focus on in our research and product development program. Our newest technology offerings are potentially market leading offerings. Future demands we see around the world represents a large opportunity for Amtech and we look to reaffirm our importance to the industry we saw every day. We work hard to deliver both incremental improvements to our customers production line and industry changing technologies for current and future customers. We expect to remain highly relevant in this industry, partnering with our customers to deliver the capabilities to produce higher efficiency and lower total cost of ownership solar cells. We remain steadfast in our plan to continuously enhance our technology portfolio, perfecting existing technologies, introduce new ones, and from a marketing perspective expand our global footprint in conjunction with our ongoing pursuit of profitable growth over the long-term. And now I'll turn the discussion over to Fokko.

Thank you, J.S. Welcome to everyone who is joining us today on the teleconference and webcast. I too would like to note my appreciation for you taking the time to join us today. One of the things I'd like to highlight on this call is the progress we're making with our next generation products. Last quarter we commented about the interest we’re seeing in our high throughput PECVD system from Tempress and the atomic layer deposition system from SoLayTec. These systems were notable contributors to our bookings in the last two quarters. Combination of installed PECVD system plus what we currently have in backlog is about 2 gigawatt production capacity with the orders coming primarily from our leading-edge top-tier Asian customers. In addition, we have several 100 megawatts of ALD systems, either installed or in backlog and this is a clear evidence the market is embracing these technologies. The combination of our next generation PECVD and ALD systems is designed to improve efficiency and reduce customer's total cost of ownership for higher efficiency cell structure such as PERC and N-type. We’ve good momentum going with PECVD and ALD and we are focused on driving notable penetration of our addressable market with these technologies. Over the longer term with our research, development, our ongoing customer calibrations, of which all are part of our DNA, backbone of what we do every day and we look forward to continued momentum and success in the growing marketplace. Our R&D, as well as the acquisition of advanced technologies we’ve made over time position us very well for great success in the future. Although it's too early to comment on any new technologies in detail, I can reported that we are working with a couple of customers, new technologies that we see as high potential disruptive capabilities. I cannot say more this time, but again emphasis we are constantly looking at what is next. In summary, for our solar business today, we continue to build upon a strong quotation pipeline and the conformation of quotes into sales for our highly relevant offering in the marketplace. There is no doubt we’ve the differentiating technology solutions with our high throughput diffusion furnaces, the new high throughput PECVD systems, the anti-reflection -- for the anti-reflection coatings, and when combined with the atomic layer deposition tool for our high-efficiency lower cost solution such as PERC and N-type. Let's now discuss our semiconductor business. We are pleased to report that BTU had a good quarter. The business was cash flow positive, plus we had a positive operating earning driven by high revenues, as well as benefits from gains by the cost control measures implemented over several prior quarters. We're also pleased to report bookings are improving and the business is moving in the right direction and the cases are that CapEx spending for electronics and semiconductor businesses picked up overall, but BTU is and should be the beneficiary of that upturn. On our LED and polishing business, lately we've seen that we believe to be a cyclical decline in business, which may continue for a few quarters. However, at these lower levels the business continues to generate positive earnings and cash flow. Since I mentioned that BTU is benefiting from prior cost containment initiative, I want to emphasize that this continues to be a priority throughout our global organization. We remain laser focused on reducing costs at all levels, while ensuring solid investments is made in the right areas. And as reflected in this quarter's result, we’re getting leverage from the changes we made over time. We look forward to fully leveraging our streamline structure in optimizing our margins as a result of improved processes that we continue to make both at the corporate and at the operational levels. And now Robert will go over our third quarter fiscal year 2016 financial results. Robert?

Thank you,. Fokko. Customer orders in the third quarter of fiscal 2016 were $30 million, of which $13.2 million were solar. This compares to $45 million in the preceding quarter of which $28 million were solar. In the third quarter of fiscal 2015, our orders were $30.2 million, of which $15.2 million was solar. Solar orders fluctuate significantly. So it is important to note that for the nine months ended June 30, 2016 customer orders were $110.7 million, including $64 million of solar compared to $91.1 million in 2015 including $55.9 million of solar. That represents a 21.4% increase in customer orders, nearly 15% increase in solar orders reflecting significant growth in our diversified businesses when comparing the first nine months year-over-year. At June 30, 2016, the Company's total order backlog was $63.8 million, including solar orders of $45.3 million. The effect of foreign exchange during the third quarter of fiscal 2016 on our backlog was a decrease of approximately $1 million. Backlog includes deferred revenue and customer orders that are expected to shipped within the next 12 months. Net revenue for the third quarter of fiscal 2016 was $33.3 million compared to $22.5 million in the preceding quarter and $40 million in the third quarter of fiscal 2015. The increase compared to the previous quarter is primarily due to increased shipments from our solar and semiconductor segments. The decrease from our prior quarter is due primarily due to lower shipments and higher deferral of revenue from the solar segment in which demand can vary significantly from quarter-to-quarter. Gross margin in the third quarter of fiscal 2016 was 29% compared to 27% in the preceding quarter and 25% in the third quarter of fiscal 2015. The higher gross margin compared to the previous quarter is primarily the result of higher volumes at our solar and semiconductor segments. The higher gross margin compared to a year-ago is primarily due to higher gross margins achieved in our semiconductor segment due to more favorable product mix. Selling, general and administrative expenses in the third quarter of fiscal 2016 were $8.7 million compared to $7.4 million in the preceding quarter and $10.1 million in the third quarter of fiscal 2015. The increase compared to the previous quarter is due to the increased commissions and shipping expenses resulting from the higher shipments. The decrease compared to a year-ago is due to lower commission's and shipping expenses, resulting from lower shipments and $700,000 from our cost reduction efforts. Research, development and engineering expenses were $1.6 million in the third quarter of fiscal 2016 compared to $2.2 million in the preceding quarter and $1.3 million in the third quarter of fiscal 2015. The lower RD&E expense compared to the previous quarter is the lower spending and slightly higher recognition of revenue. The higher research, development and engineering expense compared to a year-ago is due primarily to the deconsolidation of Kingstone in fiscal 2015. Depreciation and amortization in the third quarter of fiscal 2016 was $700,000 compared to $700,000 in the preceding quarter and $800,000 in the third quarter of fiscal 2015. Income tax expense was less than $100,000 for the three months ended June 30, 2016 compared to $1.7 million in the preceding quarter and $300,000 in the third quarter of fiscal 2015. Income tax expense in Q2 2016 is primarily related to the $2.6 million pre-tax gain on the sale of the exclusive sales and service rights for Kingstone ion implanter. The net loss for the third quarter of fiscal 2016 was $1.2 million or $0.09 per share compared to a net loss of $1.5 million or $0.11 per share in the preceding quarter and net loss of $1.6 million or $0.12 per share for the third quarter of fiscal 2015. Total revenue by geographic region for the third quarter was The Americas at 17%, Asia-Pacific at 76%, and Europe at 7%. We had $28.3 million of unrestricted cash and cash equivalents at June 30, 2016, that compares with $31.8 million at March 31, 2016. The decrease in cash and cash equivalents during the quarter was primarily due to cash used to fund working capital to support the expected higher revenue in the fourth quarter. Now let me move over to the outlook. The Company expects revenues for the quarter ending September 30, 2016 to be in the range of $35 million to $38 million. Gross margin for the quarter ending September 30, 2016 is expected to be in the mid to high 20s percent range, with improved operating margin. 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 upon customer acceptances, all of which can have a significant effect on operating results. A substantial portion of our revenues are denominated in euros. The revenue outlook provided today is based on an assumed exchange rate between the United States dollar and the euro. A significant decrease in the value of the euro in relationship to the U.S dollar could cause actual revenues to be lower than anticipated. This concludes the prepared remarks portion of our conference call. Operator, please open the call to questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Mark Miller with Benchmark. Please go ahead.

Good afternoon. I had a question. The PECVD systems order you received was really substantial and can I estimate that you just gave in terms of gigawatts or megawatts increase in the backlog. But in terms of dollars, increase from the backlog at the end of June quarter would it be inaccurate to say that that increase -- the dollar amount to your backlog by 20% to 25% or is that too high?

Oh, that’s too high.

Can you give us any estimate of what it would be?

Fokko here. Obviously, we don't give the exact dollar amount of the systems. So, the systems normally do somewhere between 80 and 120 megawatt production capacity. That’s denuded, the high throughput ones and -- but we don't keep this in our exact selling price for that.

Okay. Your R&D expenses saw significant decrease sequentially. Do you expect that status level at least for the next couple of quarters?

They will vary division and quarter-to-quarter. But it is reasonable to say that they will be in that range, maybe a little bit higher.

Okay. There is a lot of uncertainty right now about the outlook. You mentioned it could be lower for 2017 in terms of global installations. I think that uncertainty is over policy decisions in China, Japan, and U.K. Has there been any better visibility about what’s going on in terms of policy that you know of in these three countries?

No, not really. Yes, it is one of the ways to look at. Some people predict it's going to be a little bit lower. On the other side, there has been such a large share, amount of new capacity additions that have been planned and announced, but there is still quite a bit that needs to be build up. So, I don’t think that directly has a large effect and that's also what J.S commented. There is still a lot of that expansion that still need to be done. There is line upgrades. There is technology changes. So, of course there will be some effect on equipment, production equipment market, but still those countries we don't have more outlook than that has been announced by others and various publications.

Just one last question. You mentioned that India would have 40 gigawatt installed capacity. Was that by 2020?

Yes.

Thank you.

Yes. There is still a few years to go.

Okay. Thank you.

Thanks for the questions.

[Operator Instructions] The next question comes from Jeff Osborne with Cowen and Company. Please go ahead.

Great. Sorry for the background noise. But just a couple of questions here. How should we be thinking about the tax rate in the second half? And then, you commented on R&D and expenses of general, but I guess, I was just a little perplexed with the higher revenue in upcoming quarter, why would the gross margin guidance be kind of mid 20s to high 20s when you just posted a 29%. Was there any kind of one-time items as it relates to mix this quarter that help the margin?

Yes. The third quarter benefited from a cancellation of a fee and that was in order from 2011. And with due information we determined that that order should be treated as canceled. So we took the deposit into income in the third quarter with no associated costs. So that was one of the things we mentioned in the 10-Q and I believe in the press release as well.

And then, how should we be thinking about the tax rates for the upcoming couple of quarters, or the tax expense, fixed dollar amount?

Well, fixed dollar amount isn't really the way to look at it. I would say it's going to get back to a more normalized percentage.

Okay. Any -- do you have a sense of what that percentage would be? Your taxes over the past three years have been all over the place, so I just want to make sure that when the press release comes out, if we're all in line on revenue and then why the up on EPS that could have an adverse impact on your stock and it's something that maybe you have a better hand alone that you could communicate a little bit better, but moving beyond that Fokko, I guess, just certainly a lot of uncertainty in the solar market in terms of pricing and whatnot. Can you just talk about any discussions that you’ve had with customers possibly about delaying shipment of any of the units? Is there any concern that you have given the sudden drop in pricing since late May for module?

So far from what we have in the backlog today we have not seen that. There has not been discussions about it. That doesn’t mean that they could not come, but now we have not seen that people planning for that. Besides that, there is also a lot of potential of new capacity expenses that are not announced, new people that start to build relatively larger manufacturing line, so there is still a lot of activity even while. On one side it looks like prices are going down and -- so there is still a lot of opportunity for us even in this market.

Perfect. I had two more -- one, can you talk about what the end market, the strength were on the BTU side? Was this on the repo side or some other packaging equipment? And then also if you could just touch on -- so my understanding, I thought you were going to combine that [indiscernible] between BTU and Amtech later this year. How should we be modeling any potential OpEx savings if that’s the case?

Let's take the last one first. There will be some OpEx improvement, but they’re not huge, it's also more on the -- being all under one roof, makes it a big advantage. So there will be some OpEx, but I don't know the exact number. But that's part of our total cost savings that we’re really working on hard over the last year and also of course in the time to come. If you look at BTU, yes, I think majority it is from the mix of the reflow, especially there has been a period when the semi-packaging was slowing down, because of mergers that were taking place with some of our very important customers and all of that is now sort of stabilized. So, it’s the product mix between the standard reflow and a reflow for semiconductor packaging. And at the same time, some of the contract manufacturing and improved margins on some of the high-temperature furnaces that were built by BTU in America. So it's a mix, but very, very important. The acquisition was very much for the reflow and has a better mix between solar and non-solar, And of course for a while we were disappointed that they hadn't [indiscernible] out away the expected, but now we really see it improving to where it -- where we had hoped it to be from the beginning. So we’re really, really positive on that.

Okay. If I could squeeze one more and what you attribute the OED weakness still in terms of indicating in the last couple of quarters there is something at the customer level o just broader macro and OEDs will be [indiscernible]?

Well, it is a little bit of a mix. The pricing is very much under pressure, well that’s nothing new. We had it in LED for quite some time, but also there some of the vendors for the sapphire came from an area where the currency was much, much lower there for quite some time and that had an effect in that market. And there is a large, large overcapacity in LED that has been there, but that constantly has a lot of pressure on the market and -- but that was the primary area.

Appreciate it. Thanks so much.

Welcome.

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

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