Amtech Systems, Inc. (ASYS) Q1 2017 Earnings Report, Transcript and Summary

Good day, and welcome to the Amtech Systems First Quarter 2017 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Robert Hass. Please go ahead.

Good afternoon and thank you for joining us for Amtech Systems first quarter fiscal 2017 results conference call. On the call today are J.S. Whang, Amtech's Executive Chairman; Fokko Pentinga, our President and Chief Executive Officer; and myself, Robert Hass, Amtech's Chief Financial Officer. After the close of trading today, Amtech released its financial results for the first quarter fiscal year 2017 ended December 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. 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 in volatility and the demand for our products; the effect of changing worldwide political and economic conditions, including government-funded solar initiatives and trade sanctions; the effect of overall market conditions, including the equity and credit markets and market acceptance risks. Other risks are detailed in our Securities and Exchange Commission filings, including our Form 10-K and Forms 10-Q. I will now turn the call over to J.S. Whang, our Executive Chairman, to begin the discussion.

Thank you, Robert. I'd like to welcome everyone, and thank you for your interest in Amtech. We appreciate you joining us as we review our Q1 fiscal year 2017 financial results and update you on our markets. As you saw in our recent press release, the market's interest in our new technologies is converting to significant purchase orders. Our ability to continue to invest and develop newer technologies during the lengthy and severe solar equipment down cycle is now directly contributing to our success. We are excited about the future, as a global demand for advancing solar solutions is resulting in our customers expanding investment in our new technologies. More and more, solar power projects are in the planning and execution phase in both developed and developing countries. There is a clear support around the globe for solar renewable energy. Our technology solutions are increasingly efficient, and they are effectively lowering the total cost of ownership. The benefits and improved economics of solar are improving each day as we partner with our customers and research institutes to continue to advance our technologies. We are clearly having a role in the ongoing goal to improve solar convergence efficiencies. Each step in the moving forward takes time, but ongoing progress is clearly evident. And we are excited and confident that we are on the right path with our n-type in the PERC solutions as we diligently focus on the market's expansion. Amtech's business model consists of our solar growth business units and steadily performing semi and polishing business units. Our newly acquired BTU International is performing very well, along with Bruce Technologies and PR Hoffman. And now, I will turn the discussion over to Fokko, our CEO. Fokko?

Thank you, J.S. A warm welcome to everyone who is joining us today in the teleconference and webcast. Thank you for your interest in Amtech Systems. Let me start out by saying that we are excited about our company's prospects. Our solar and semi-electronics business units are performing well. Our first quarter revenue of $29.1 million exceeded the high side of the guidance range we provided during our 2016 fiscal year-end earnings press release by almost 10%, reflecting a better-than-anticipated product mix and better-than-expected contribution from our solar and SEMI business. As a norm, our first quarter is relatively soft quarter, but this year's first quarter shipment also included the first shipment of our complete perk solution that combines SoLayTec spatial atomic layer deposition tool for the deposition of aluminum oxide and Tempress' high throughput PECVD tool for the silicon nitride layer, where the stack of both layers produce a higher efficiency PERC cell. The quarter revenue outperformance results in a higher-than-expected gross margin, which was close to the 30%. All of our segments, solar, semiconductor and polishing, contributed to achieve breakeven and positive EBITDA. Our January announcement of large orders included our high throughput solar PECVD systems and bi-facial n-type turnkey audit. Our fiscal year-to-date booking through January 20, 2016, was $84 million. We expect current backlog, including our high-value January bookings and our growing sales pipeline to make a meaningful impact on this year's revenue and profitability, primarily in the second half of our fiscal year. Our current order book reflects the interest of the top-tier Asian cell manufacturers in our advanced equipment and technologies. The order for the n-type bi-facial turnkey project is from a new customer in China, who will use the technology for bi-facial glass, glass module design in the first of the multiphase 1-gigawatt cell and module expansion. We received a substantial deposit in January as part of that order. In line with the ongoing industry's objective to lower cost of ownership, our high throughput PECVD and diffusion system require fewer operators, less chemicals and gases and the electricity per wafer, as well as less cost base. By working side-by-side with the customers and research institutes, such as ECN, we are able to offer market-leading equipment and technology solutions for p-type and n-type solar cell lines, including the now-proven n-type bi-facial and the PERC and the advanced N-PERT technology. We believe that we are the partner of choice for advanced technologies for today and the future. We are experiencing a technology-buying cycle momentum at this time, and we are pleased that our product offering includes the highly relevant, extra fancy equipment and technologies, which are being rapidly adopted by our customers. Now let me discuss our semiconductor and polishing segments. The semiconductor segment includes diverse product mix that provides important cash flow that supports the ongoing investment in solar research and development and further penetration of our key growth market. Our semi business has been a steady contributor over the last few quarters, and its underlying markets have improved. During our first quarter, this segment produced both good volumes in margin, reflecting solid demand in the semiconductor packaging and electronics assembly marketplace for our reflow office. We also saw solid demands for the semi diffusion furnace. This demand for the semiconductor and atomic product was driven primarily by the customers in Asia, but also Europe and Americas and across multiple industries, including electronics and automotive. As a leading global supplier of production equipment and supplies for the solar, semi and LED market, we continue to invest in our future by executing our strategy of optimizing our semi and polishing segments to support our solar growth initiative. We know our customer's capital expenditure are highly selective today, and that they balance cautious spends with the absolute need to invest in the best technology solutions. So with Amtech, we, too diligently focus on making prudent investments to meet the near and longer-term objectives of our customers, as well as expand awareness in the global market of our leading-edge high throughput and cost-effective production equipment and technology. And now Robert will go over the first quarter for the fiscal year 2017 financial results. Robert?

Thank you, Fokko. Let's now review our first quarter fiscal 2017 financial results. Customer orders in the first quarter of fiscal 2017 were $34.7 million, including $15.9 million of solar compared to $27.7 million, $11 million of which was solar in the preceding quarter and $35 million of orders in the first fiscal quarter of 2016, including $23 million of solar. These orders do not include the large order announced in January 2017 for a turnkey project in China for our solar cell manufacturing line for n-type bi-facial cells or the other January orders in that order announcement. At December 31, 2016, the company's total order backlog was $51.5 million, including $35.8 million of solar orders compared to a total backlog of $48.6 million, including solar orders of $34 million at September 30, 2016, and $42.9 million, including solar orders of $31.3 million at December 31, 2015. Backlog includes deferred revenue in customer orders that expected to ship within the next 12 months. Revenue for the first quarter of fiscal 2017 was $29.1 million, a decrease of 31% compared to $42.4 million in the preceding quarter and an increase of 32%, compared to $22 million in the first quarter of fiscal 2016. As reflected in the sequential decrease in revenue, which was due primarily to the timing of the shipment of large system orders that contributed to the higher solar revenue in the fourth quarter of fiscal 2016, and due to the seasonality in our semiconductor business. The increase from the first quarter of fiscal 2016 is due primarily to increased demand for solar PECVD tools and semiconductor equipment. Gross margin in the first quarter of fiscal 2017 was 29%, compared to 29% in the previous quarter and 27% in the first quarter of fiscal 2016. Sequentially, the gross margins benefited from the recognition of previously deferred profit that was offset by lower capacity utilization. The higher gross margin compared to a year ago is primarily due to increased sales volume and improved product mix in the semiconductor and polishing segments, offset by lower deferred profit recognitions in the solar segment. Selling, general and administrative expenses in the first quarter of fiscal 2017 were $7 million compared to $10.3 million in the preceding quarter and $7.6 million in the first quarter of fiscal 2016. Sequentially, the decrease in SG&A results primarily from the collection of approximately $1 million of previously reserved accounts receivables and a provision for doubtful accounts receivable of $1.8 million recorded in the fourth quarter of fiscal 2016. Compared to the same quarter in fiscal 2016, the decrease resulted primarily from collection of previously reserved accounts receivable, partially offset by higher selling expenses related to higher revenues. SG&A expenses include $300,000 of stock-based compensation in the first quarter of fiscal 2017, as well as in the first and fourth quarters of fiscal 2016. Research, development and engineering, RD&E expense was $1.6 million in the first quarter of fiscal 2017, compared to $2 million in the preceding quarter and $2.3 million in the first quarter of fiscal 2016. The decrease is primarily due to certain R&D expenses at SoLayTec, now being reflected in cost of goods sold and SG&A. This is a result of the company and our atomic layer deposition product progressing from the development stage to more of a manufacturing stage. Depreciation and amortization in the first quarter of fiscal 2017 was $654,000 compared to $697,000 in the preceding quarter and $783,000 in the first quarter of fiscal 2016. Income tax expense in the first quarter of fiscal 2017 was $100,000 compared to $1.1 million in the preceding quarter. The sequential decrease is due primarily to an increase in the valuation allowance on deferred tax assets in the fourth quarter of fiscal 2016 and an increase in income tax before - in income for income taxes in the United States in that quarter. The company had income tax expense in the first quarter of fiscal 2016 of $300,000. Net loss for the first quarter of fiscal 2017 was $53,000 or zero cents per share compared to a net loss of $0.3 million or $0.02 per share in the preceding quarter and a net loss for the first quarter of fiscal 2016 of $4 million or $0.31 per share. Total unrestricted cash and cash equivalents at December 31, 2016, were $23.6 million compared to $27.7 million at September 30, 2016. Cash declined primarily due to cash used to fund working capital. Total cash, including restricted cash, increased to $45.8 million as of January 31, 2017, due primarily to customer deposits we received with the turnkey and other orders for both solar and semi. Now let's turn to the outlook. The company expects revenue for the quarter ending March 31, 2017, to be in the range of $27 million to $30 million. Gross margin for the second quarter ending March 31, 2017, is expected to be in the mid-20% range with operating margin negative, as we do not expect a repeat of the collection of the previously reserved accounts receivable that benefited in the first quarter. Due to the recent increase in orders, including the large turnkey order received in January, revenue is expected to increase significantly in the second half of our fiscal 2017 year and expected to lead to an improvement in the results of operations for the second half as compared to the first half of fiscal year. 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. A substantial portion of Amtech's revenues are denominated in euro. The revenue outlook provided in this press release is based on an assumed exchange rate between the 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. Now open the call operator, to questions.

Thank you. [Operator Instructions] And the first question comes from Jeff Osborne with Cowen and Company.

Hi good afternoon guys and congratulations on the progress. Nice to see in the outlook. I just had a question, Fokko, on the new customer for the n-type. Can you just talk about when that would be delivered? And then more importantly, I guess, out of curiosity, what are the changes with this product cycle with n-type relative to what you had maybe 4 or 5 years ago with your primary customer at that time?

Hi Jeff, thanks for the question. Thanks for being on the call. First of all, as we said, it's going to be in the second half of this fiscal year. But it's a pretty big project, and so we plan to ship most of that within this fiscal year. But the parts of it are a little bit closer to the end, so there's always a chance that we'll be a little bit later. But at least for now, we plan to ship all of that within this fiscal year. And is it technology so much different now? This technology is quite comparable. And when you do a turnkey with somebody, you got to make sure that you have something that you are 100% sure it works. Too many of those projects they start, and then there is a lot of uncertainty if you really will be able to reach it because you haven't done that before. And this one is - it's the first phase of this 1-gigawatt. So within the first phase, you can start with rather comparable, of course, a little bit better efficiency than a couple of years ago, but basically a comparable one. And then there are many, many steps that we can improve on in the later stages of the project or even adding a few steps on this. But we didn't want to take, and also the customer didn't want to take a risk in making sure that when we install it all, it all works and we have no issues. And also, therefore, there is no new equipment in there. So, therefore, normally, that should be within this time frame. It's all shippable within this fiscal year. That's the plan.

Is the revenue model, is that percent completion? Or is it recorded as the turnkey line is set up? Can you just talk about how we should be thinking about it? Is it a big one chunky quarter as that's done, that you hope to get done exiting the year as you indicated?

So, in line with our normal revenue recognition policy, we expect to be able to recognize a good part of the revenue upon shipment. This phase is made up of 2 lines. There is some hope that we may deliver one line in the June quarter, but as Fokko says, these things can move out a quarter.

And then what is the deferral percent on this? 10% or 15% that then upon acceptance would come in after a couple of quarters?

I would say it’s going to be larger than that because it does include integration of all these products from - our products, including the products of several vendors.

And to that point, some of your peers in the last major CapEx cycle years ago that did turnkey lines had notably lower gross margins because of the third-party content. How should we think about this kind of cycle of orders? Just looking at the gross margin line in particular? I guess, what percentage of the content of the line, first of all, is your own versus third parties? And then more importantly, what should be a good blended gross margin for that?

Well, first, I think, Jeff, was the more products that we have. We now have the PECVD. And as you know, there is 2 PECVD steps in here and there's the foster and bond diffusion. So that already means that a relatively a large portion of the equipment is our own equipment. That helps already a lot. And secondly, yes, there is the third party. So it will have some effect. But it will not be as huge as when you just have a pass-through where there's a huge amount of third party's equipment. And so in that's this case, it's not going to be - it's going to be a little bit lower, that portion of it. But it's still -- we're going to still be okay on that one.

But I guess, is mid-20, the high-20s a reasonable target? I mean, I assume it's not less than 20%?

So, I would say that we're still doing a detailed analysis of the various components of revenue. As you know, multiple deliverable contracts require a very specialized accounting treatment. And so it could vary.

Okay. And then how do we think about the OpEx ramp? You highlighted the downturn, the flexibility of the Dutch labor force, how do we think about the flexibility on the upside as this kind of mini burst comes in? And how do we think about modeling that?

Well, first of all, the way of operating a - particularly, Tempress changed a bit because we do outsource more - more larger portions of the machine. So that means the ramp-up is a bit easier. Large portions of the electronics are outsourced. And then it takes just a few hours to put it in a furnace. Large sections of the machine are completely outsourced, so that makes it much easier to ramp up. And hopefully not, but also around balance, you've got to take care of that possibility too in a year or so. So, or even ramp up more. And so that's what we learned from 6 years ago. We didn't have time then to model the operations to do that because you got the orders and everything went much faster than everybody expected now. We've learned and say, well, we have to do a more of a mix of outsource and internal. So, we don't see that so much as an issue this time.

That's good to hear. Just a few more, if you don't, mind, Fokko. But my assumption is because you mentioned the cash deposit, I'm looking at the $45.8 million that you mentioned, including the restricted cash, that the n-type turnkey is for somebody that's relatively new to solar?

Yes, you could say that. It's not one of the top 10s. They would have done it themselves then they wouldn't need us. But it's somebody that's relatively new to solar. That's correct.

Okay. Is there any risk on the credit side? Or just the ramp-up of that to get the higher-than-expected deferred revenue piece? I guess, how do we think about your ability to hold their hand to get that ramped up quickly?

We're quite certain of that. First of all, projects like this go on letters of credit, so that already helps you to put it out right. We know that in these projects, there is always a chance that facilities will take longer. But we took care of that in our agreement. So - of course, for the last bit, it's always a bit more difficult. But for the normal startup and the timing of the different steps that need to be done, the company is highly professional. So they also understand how to take care of this, and also understand that we cannot take extreme risk. So we've taken good care of that in the contracts that have been put together.

Makes sense. And the last one question I had was just on the PERC side of the house. Certainly, you were a bit late to the product cycle relative to your Swiss competitor, and nice to see the momentum there. Can you just talk about how long the evaluation process took for the orders that you announced in January? But more importantly, what the sales funnel looks like for the rest of 2017 for that particular product, which is very exciting.

Of course, the evaluation when you put the combination in, it - you don't have all that much time because there is this cycle coming for PERC. So - that is something where the timing we have is relatively short. So in the next few months, we should be all through that. But there isn't a - in separate from each other, there is - the ALDs are in multiple places and the PECVDs are in multiple places. So, this combination and the success of that, and again, we still need to prove parts of it, but it looks good so far. It should have some effect, well, probably in start of next quarter and orders. That's what we target for.

That’s great to hear. Thank you.

The next question comes from Mark Miller with the Benchmark Company. Please go ahead.

Congratulation on your large order. I had a question about part of that order in terms of the margins of the PECVD tools. Are they still somewhat below the legacy margins you have for the legacy diffusion tools?

Well, first of all, if you look at legacy margins, the world did change compared to 4, 5 years ago. So margins are under pressure everywhere. But with the PECVD, we have a really, really good machine, high throughput. So - and also there, we have this combination of outsourcing. And of course, although, and all the stories we do, we don't talk too much about cost reductions, but this is, of course, always our Number 1. And so if it would be cost reductions alone compared to local, it would be difficult. Therefore, we emphasis very much, we have to have that combination of a good cost, but we also have to be able to provide this technology and the good machine with it. So yes, the margins may not be as they were in the old days when selling prices were high and volumes were high and all margins were under pressure. We know that solar is not an industry where everybody can enjoy huge margins, but we are very, very working hard on getting our cost down, getting any little bit of volume, and that's really coming. And that gives you as much better position also on the PECVD to get some decent margins in there.

Well, instead of the legacy tools, what about - how do the margins compare currently to your solar diffusion tools? Lower?

Well, it depends a little bit. If you do - the automation is a relatively big piece in the PECVD selling price. That automation, we do not produce ourselves. That is a buying part, which is a relatively big piece. But there is also alternatives of a local, Chinese-made automation. So if we take the PECVD alone. I think, the margins will be comparable with the diffusions. And whereas, if you have this very relatively large component of the automation in there, then - because you can't really make too much on that, then it has an effect on the margins.

Okay. In terms of the changes in recognizing R&D for SoLayTec and that’s going to continue the rest of the year, so we'll see R&D cost similar to last quarter for the most of the year?

Yes. Now that we're moving more into commercial stage or manufacturing stage, we would start classifying cost in SG&A and cost of products sold.

And how can we look at taxes for 2017?

As you've seen in the past, that is difficult to project. It varies quite a bit and it depends upon the mix of product and where that revenue is coming from. But we will, this year, expect to benefit from the net operating losses that we have in Europe. And with this big order, when that ships, the profit on that, largely, will be sheltered by those net operating losses, which have been fully reserved.

Okay. Current forecast for 2018, both for solar or semi or for modest - modestly higher industry revenues, is that consistent with what you believe?

Well, if you look at some of the reports that come out, they would expect that solar would go down a little bit in 2017 compared to 2016. But I personally think that may not necessarily be because it would be the very first time in history that we have a year where it was going down. So for me, it's still not that certain, if - what it will be. We see China preparing for quite a bit of install, going recent information, in PV-Tech, they're talking about polysilicon really buying a lot and shipping to China. So - and I don't really expect them going down too much. So, I still expect some growth. And semi has been relatively strong, and I don't see that clearly going down at all, especially in the segment where we - really semiconductor side of diffusion, it's for the automotive and the power side. Well, that's growing tremendously. And also, on the reflow side for the electronics, we don't really see that going so bad this year. Last year, it was beginning more difficult. But since middle of last year, we see it come up. And solar and semi, both of them are - we see it as if - at least in that sections where we are in. We see that there's a good - still reasonably good growth.

Thank you.

Welcome.

[Operator Instructions] And it appears at this time that we have no more questions. So 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. And thank you, everyone, for your time today and for your interest in Amtech. This concludes today's call.

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