Amtech Systems, Inc. (ASYS) Q2 2017 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Amtech Systems Second Quarter 2017 Earnings Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask question. [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’ Second 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 second quarter fiscal year 2017 ended 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. 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 risk factors are detailed in our Securities and Exchange Commission filings, including on 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. J.S.?

Thank you, Robert. Thank you for your interest in Amtech. We appreciate your joining us as we review our Q2 results and update you on the activity we are seeing in our markets and the details regarding our recently announced new solar orders. We are excited about our future, given the continuously growing interest in solar energy around the world. Global demand for solar is being driven by public and private agendas, commercial and individual interest. And the global upswing in demand is supported by industry-driving factors. The often discussed risk of a climate change is just one influencing factor. Equally important to many is the desire to achieve energy freedom through energy independence, and for enterprise and individual consumers to be able to choose what energy solutions best fit their needs. Today, solar is a viable energy solution offering increasingly higher efficiency at a lower total cost of ownership. The technologies are evolving in a way that positions solar to be highly beneficial as an optimal energy solution for the long term. All combined, these drivers present us with an exciting future. We look to participate in this market growth, expanding into new technology markets, adding new client relationships where we partner to jointly advance their technology solutions. We are physically engaged with each of our customers in the management of their manufacturing capabilities, productivity and higher efficiency solar cells. Our team stayed very busy at the largest solar trade show, SNEC, in Shanghai just last month, having robust discussions with current and prospective customers, looking at both what is needed today and what will be required in the future. We look forward to being a part of these exciting, continuously evolving opportunities. We believe our n-type and PERC technologies are winning solutions. We were pleased to report that last month April, we received a second large n-type turnkey order, representing Phase II of a multiphase 1-gigawatt project for a customer in China, in addition to the Phase I turnkey order which we announced in January. These big turnkey orders are a result of, a direct result of our ongoing technology investment and give us a leading position in the n-type technology. In addition to our solar business, our semi and polishing business units continue to deliver the important profit and cash flow for us to continue to support our solar growth strategy. The BTU acquired in 2015 had its fourth consecutive profit quarter in March. And now I will turn the discussion over to Fokko. Fokko?

Thank you, J.S. A warm welcome to everyone who is joining us today on the teleconference and webcast. Thank you for your interest in Amtech Systems. We have much to report on today. Our financial results reflect strong second quarter and first half progress relative to the same period in 2016. It was 46% and 39% year-over-year revenue increase in the second quarter and year-to-date, respectively, and the significantly improved operating margins. Revenue in this quarter exceeded and gross margins met the high side of the revenue guidance we provided at the beginning of the quarter. We are very pleased with our $68 million of total bookings in the second quarter, including $47 million of solar orders, which is the highest solar booking since the second quarter of 2011. We produced a book-to-bill ratio of 2.7 for solar and 1.4 for our semiconductor segment. With those bookings we now have, at March 31, 2017, a backlog of $87 million, which is a 67% increase since December 31, 2016, and the highest in six years, providing a very good foundation for the coming quarters. And adding to this, we’re pleased to say that we’re seeing good order momentum in the current quarter as well as sustained healthy quoting activity. As J.S. mentioned, we recently announced that our subsidiary Tempress Systems has received a follow-on order for our bi-facial n-type technology, which includes our high-throughput PECVD and diffusion systems. The first and the second phase of the multiphase 1-gigawatt project is designed to manufacture the high-efficiency n-type bi-facial solar cells and modules at an attractive cost per watt. The second turnkey order is similar in size to the first phase order we announced in January from this new customer in China. Operationally, together, with our vendors and partners, are making good progress in the manufacturing of the equipment and planning for the installation and start of this first phase of this important project. Our fiscal year-to-date bookings through the end of April 2017 were approximately $145 million, bringing our backlog to approximately $125 million near the end of April. We expect these increased bookings in backlog to convert to value-driving revenue and earnings. Given the market’s constant pursuit of this higher efficiency and lower cost per watt we see increased adoption of the n-type bi-facial technologies for production of crystalline silicon cells. There was much excitement at this year’s April SNEC show in Shanghai about trending adoption of these bi-facial cells which require two PECVD steps and two diffusion steps. In contrast to the standard mono-facial modules, bi-facial modules generate electricity from both sides. As the rear side makes use of refractive – light reflected from the surrounding and diffused light, these modules can yield up to 30% more energy depending on the circumstances. At our Tempress subsidiary, we are installing a relatively large solar plant with more than 1,400 bi-facial n-type [indiscernible] handles so we can monitor the performance of bi-facial panels in the field. This helps us to support our efforts in providing our customer base with valuable field data. While producing annual energy for our European headquarters in the Netherlands, it is expected to exceed 400-megawatt hours. By working side-by-side with our customers and technology institutes, we’re driving down the cost per watt by offering market-leading high-throughput equipment and technology solutions for mono and multi p-type and n-type solar cells, including the now proven n-type bi-facial and the PERC cells and the advanced n-PERT technology. With that we believe this makes us the partner of choice for advanced equipment and technology for today and the future. Now let’s discuss semiconductor in the polishing segment. Our semiconductor segment produced both good volumes and margins in this quarter, reflecting solid demand and a broader semiconductor packaging and electronics assembly marketplace for our reflow office. And, as a result, this segment had a very good quarter. The semi segment produces and sells a diversified product mix serving multiple industries and provides important cash flow that supports our ongoing investments in solar research and development for the penetration of our key market. At the same time, we also are making targeted investments in the semi product improvements and new features that have been well received by our customers. This is in order to remain the leading supplier in the markets we serve and to ensure that our semi business continues to be a steady contributor to our overall business. We also saw continued solid demand for our semiconductor diffusion furnace. This demand for our semiconductor and electronic products was driven primarily by customers across multiple industries including electronics and automotives. Also this quarter, our polishing business continued to provide good margins and profits, which they do continuously in a very consistent pace. 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 and optimizing our semi and polishing segments to support our solar growth initiative. And now Robert will go over our second quarter of the fiscal 2017 financial results. Robert?

Thank you, Fokko. Let’s now review our second quarter fiscal year 2017 financial results. At March 31, 2017, the company’s total back – total order backlog was $87.4 million, of which solar accounted for $66.9 million, compared to the total backlog of $51.5 million at December 31, 2016, of which $35.8 million was solar. As announced on April 25, 2017, we received a follow-on order for the second phase of a multiphase 1-gigawatt project, in addition to the order for the first phase announced in January 2017. The company’s total order backlog as of April 25, 2017, was approximately $125 million. Backlog includes deferred revenue and customer orders that are expected to ship within the next 12 months. Net revenue for the quarter of fiscal 2017 was $32.9 million, compared to $29.1 million in the preceding quarter and $22.5 million in the second quarter of fiscal 2016. The sequential increase and the increase from the prior year quarter is due primarily to increased demand for our solar PECVD and ALD tools as well as our semiconductor equipment. Gross margin in the second quarter of fiscal 2017 was 25% compared to 29% in the preceding quarter and 27% in the second quarter of fiscal 2016. Sequentially and compared to prior year, the gross margins were lower in our solar segment, primarily due to a net deferral of profit compared to a net recognition of profit previously deferred. But we’re partially offset by higher gross margins in our semiconductor segment due to favorable product mix. Gross margins in our semiconductor segment were also higher in the second quarter of 2017 compared to the prior year due to higher sales volumes and higher capacity utilization. Selling, general and administrative expenses in the second quarter of fiscal 2017 were $8.3 million, compared to $7 million in the preceding quarter and $7.4 million in the second quarter of fiscal 2016. Sequentially, the increase results primarily from the collection in Q1 2017 of approximately $1 million of previously reserved accounts receivable. Compared to the same quarter in fiscal 2016, the increase results primarily from higher selling expenses related to higher revenues. Research, development and engineering expense was $1.5 million in the second quarter of fiscal 2017, compared to $1.6 million in the preceding quarter and $2.2 million in the second quarter of 2016. Depreciation and amortization in the second quarter of fiscal 2016 was $0.6 million compared to $0.6 million in the preceding quarter and $0.7 million in the second quarter of fiscal 2016. Income taxes in the second quarter of fiscal 2017 was $0.2 million compared to $0.1 million in the preceding quarter and $1.7 million in the second quarter of fiscal 2016. Income taxes in the second quarter of fiscal 2016 was primarily related to $2.6 million pretax gains on the sale of our exclusive sales and service rights for the Kingstone ion implanter. The net loss for the second quarter of fiscal 2017 was $1.4 million or $0.11 per share compared to a net loss of $53,000 or $0.00 per share in the preceding quarter and a net loss of $1.5 million or $0.11 per share for the second quarter of fiscal 2016. The second quarter of fiscal 2017 did not benefit from any items comparable to the gain on the sale of the exclusive sales and service rights for the Kingstone ion implanter in the same quarter last year. Unrestricted cash and cash equivalents at March 31, 2017, were $38.9 million compared to $23.6 million at December 31, 2016. The increase in cash and cash equivalents is primarily due to customer deposits received from the turnkey order announced in January, and good collection on receivables for both solar and semi, partially offset by cash used to begin work on that turnkey order. Now let’s turn to the outlook. Revenue in the second half of fiscal 2017 is expected to be much higher than in the first half of this fiscal year and is expected to lead to an improvement in the results of operations for the second half as compared to the first half of the fiscal year due to the shipment of the equipment for the large turnkey order announced in January. Even so, a meaningful portion of the revenue and profit from that Phase I will be deferred until the installation and acceptance, which is expected in fiscal 2018. The large follow-on turnkey order announced in April, which we referred to as Phase II, is not included in the backlog as of March 31, 2017, and is expected to ship in the first half of fiscal 2018. The company expects revenue for the quarter ending June 30, 2017, to be in the range of $39 million to $42 million. Gross margin for the quarter ending June 2017 is expected to be in the low to mid-20% range, with operating profit – I apologize, with operating margins slightly negative, both of which are influenced by product mix and revenue deferrals. Operating results could be impacted by the timing of system shipments, particularly the first shipment of the equipment for the turnkey order, 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. 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 U.S. dollar and the euro. A significant decrease in the value of the euro in relationship to the United States dollar could cause actual revenues to be lower than anticipated. With that, I’ll turn the call back over to the operator for questions and answers.

[Operator Instructions] Your first question is from Jeff Osborne at Cowen & Company.

Congratulations on the strong results. Just a couple questions on my end. One, Fokko, I was wondering if you could give us what the revenue content per line is these days, both for a traditional PERC cell line, single-sided, and then also for a bi-facial, just as we think about a traditional line, give or take at about 100 megawatts per annum of production.

Well, I don’t have those numbers just ready available what a line would be. Is this a line just of our equipment or a turnkey? So there’s so many variables. And so I wouldn’t be able to give that in this session.

Okay. But in general, is it safe to say, with what’s evolving here with ALD orders and some of the bi-facial success that you’re having, but your content per line has been trending higher in this CapEx cycle than vis-à-vis the 2011 cycle?

Oh, yes. If you look at our contents on, let’s say, the bi-facial n-type line is more than 50% of our product. And even if we would supply a PERC line, it wouldn’t be all that much difference because then the diffusion becomes the ALD machine, so also you become more than 50%. But generally PERC these days is still mostly on upgrades on existing lines. And we’re not doing any turnkeys on PERC at this moment.

Got it, that’s helpful. And then it’s been awhile since we’ve had to worry about deferred revenue coming through the model. I was wondering, can you just give us a hypothetical example of how your contracts are structured? If, for example, there are $100 coming to you in content per line, are you getting 50% on shipment, 30% on installation and 20% is deferred and waiting acceptance? Or what is that rough percentages based on what’s in the backlog today?

So first of all, the deferred revenue and the subsequent recognition of that revenue does impact every quarter to one extent or another. But your percentages that you mentioned – 50%, 30%, 20% – is a very reasonable estimation.

But it’s – generally we don’t – we try to get a little bit more upon shipment, Jeff. So it’s – on average, there is 10% to 20% that’s outstanding after we do the shipment. But in general, we do try to get 80% or more when it’s shipped. And then there is the installations and the FATs. Then the 10% or 20% is split up depending on how much work is involved in the whole start-up.

Got it. That’s helpful. Just two other ones. Where did the upside this quarter come from? Was that from ALD furnaces that weren’t in the guidance? I’m just trying to get a sense of what the upside was. Or was it BTU and Reflow?

On the revenue side you mean, Jeff?

Yes, exactly, on the revenue side, correct.

I think it’s the broader one, right?

Yes, I think it’s the broader...

It’s not just one area, but yes, we did ship a couple of ALD machines. And also the Solar went shipping well on the PECVDs. But like I said, BTU is doing well, BTI is doing well, PR Hoffman. Everybody is doing reasonably well. So that’s where the extra revenue comes from.

Got it. That’s good to hear. The last question I had was just on the – what – I know J.S. some time ago had laid out a path for your customers to get above 20% efficient cells. What is the expectation as these p-type PERC cell lines are built and the n-type bi-facial cell, the new customer that you have, what’s the expectation of cells coming off the line once that’s ramped up?

Yes, I won’t be able to give it on this specific line. But if you look at the p-type, the mono PERCs, they get into the 21% range. But then again, mono PERCs are not bi-facial; they are mono-facial. And the bi-facial cell, of course, is a little bit more costly but also gives a lot of extra energy. But n-type technology ranges from around 20% to 21%. But that’s – I don’t want to specify what we have on these turnkey lines.

Excellent. And then the last question is gross margins for the upcoming quarter. Mid-20s that you printed here in the current quarter and then you guided low to mid-20s. I guess, what would be the moving pieces to take that down sequentially, just given where revenue has guided?

So, sure. We are seeing some competition that’s controlling our pricing that we have to match. So I’d say that’s primarily it. Fokko?

And of course, yes, also for the next few quarters in the turnkey lines we will have quite a bit of deferrals there because a lot of work is in the – comes afterward. But it also gives some good opportunity for the quarters after. So every downside here has a big upside a little bit later on. Which we did have also at the end, when this downturn hit us, we were still moving quite well because we had a relatively large reserve in this deferred revenue. So that’s something that – that bucket needs to be filled up again. And so – but then it really helps in the quarters to come.

[Operator Instructions] The next question is from Mark Miller at Benchmark Company.

Congratulations on your orders. Just curious, you’ve indicated this multiphase 1-gigabyte project and you’ve done two phases. Is it safe to assume there’s another phase coming, at least one more phase coming for you?

Well, we certainly hope so. But that comes when it comes. So we work hard on that but can’t say when and if. But we are not at the 1 gigawatt yet.

Okay. Also the impression I get is that most of your profits from these two phases will really be more 2018, is that correct?

A good part of it, yes, that’s right, will be in 2018 because of the deferrals.

Should I estimate 75%? Would that be in the ballpark?

I think that’s probably about right, because the technology transfer, which is one of the deliverables, will happen all in 2018.

Okay. Margins again, I know a lot of it’s impacted by deferred revenues. I’m just wondering, as we go into more growth in this area, should we expect margin improvement, especially for your PECVD tools?

Well, margin improvement has to come also from further reduction in our cost, our material cost and operational cost, and that is something we really work hard on. I mean, this is an industry where cost is everything, and therefore, for us, cost is the most important factor as well. But then again, without technology and a good design machine, a good piece of equipment, you’re not getting anywhere either. So our first target has been our technology, which we are doing well, our machines are doing well, and at the same time, but it will get more and more attention from now on, that we try to drive our cost down, both on the material side, operationally. So still, this is not something that will end. That’s the problem of this industry. It’s a constant fight and battle to reduce cost in order to improve our margins. So yes, that’s an ongoing situation. But it’s something that has all of our attention. And having good product and technologies is a really good base now to further reduce our cost structure.

Finally, can you provide cost from operations, or cash from operations?

So you can get that from our cash flow statement. Does that answer the question? I’m not sure if I got the question correctly.

That’s on your website, is that correct?

Yes, the 10-Q is...

I’m sorry. I see it on the last page of this report. Sorry.

The cash provided by operations was really good this first half, primarily due to the customer deposits.

All right. Thank you very much.

Thanks for the question Mark.

The next question is from Philip Shen at Roth Capital Partners.

Fokko, in the past when we’ve spoken we’ve talked about the equipment that’s out there historically. There’s a lot of old equipment from the 2010 and prior cycles. Can you help us understand, for the bookings that you have, what percentage of that is for greenfield lines versus refurbishment?

Well, so from our backlog and all those turnkey is, of course, greenfield and the rest is mostly for upgrades. But it’s a good question, Philip, because there’s a big installed base of not only our equipment or everybody’s equipment, but if you look at the throughput that the new machines have these days compared to those installed three, four, five years ago, it’s double or even triple. So that also means that people that still run these old lines are now competing with, once these new lines really start to become in production, with a much, much lower operating cost of those new lines. And they will most likely be forced to do something similar or stop operating. So it also has a potential for future of a lot of upgrades of existing lines. And then automatically, if you do that, then those fabs will have higher throughputs and that means higher capacity. But it certainly is a potential for the future for those new high-throughput machines.

Great. And then, as it relates to this topic of the Section 201, this is something that has taken the industry by storm as a surprise, and let’s say we think of a challenging situation where we probably won’t get the $0.78 per watt module or minimum import price, maybe we get something in the 40s or low 50s, the reality is, if pricing goes up, then there’s some degree of demand destruction of solar in the U.S. and then there might be extra supply globally. So can you talk to us about your cancellation policies for the equipment? Can your customers – to what degree can they delay taking orders or taking delivery or even cancel the equipment?

So let’s take one at a time. First of all, to be honest, what’s going to happen here with the 201 and the pricing I really don’t know. I just read today that SolarWorld is probably going to stop operating, or at least file for bankruptcy. And Suniva just did, and Mission Solar is. So what’s left? And I think First Solar is in a change from one technology to another. So that means nothing would be produced here in the U.S., where there is a big demand. And then we’re going to put a high price on all the imports. So, I mean, it’s only going to hurt us here in the U.S. because – so I don’t see how this is going to come out well for anybody. In our case, cancellation, pretty much all the projects we have is on a contract which has a down payment and letters of credit. And so generally, especially for all the orders we have in Asia, we really haven’t really gotten into trouble with that in 2011. When we had a big downturn, some things were delayed, but ultimately, we pretty much always got our money and all the contracts were fulfilled. The projects where we really lost our money were here and not so much in Asia. So pretty much all of our present contracts for solar are in Asia and they’re all under that type of deal. I don’t really see too much of an issue there. I also don’t really see that demand is going to slow down that dramatically if these new rules are going to come. And question to you is what do you expect? Does this Solar World have anything to do with this and what Suniva filed? It’s difficult for us to see into it.

Yes. My sense is they were – I think they wanted – Suniva wanted them to be a part of the petition, I believe, but ultimately they were not. And we’ll see what ends up happening. And ultimately there’s likely going to be – certainly some parties want a global negotiated settlement to put all the trade cases behind us all together.

That would be great. So also we can see it as an upside. Sometimes there – we’re stirring up a few things, then something good comes out of it. It could really happen that all of this brings all these trade cases to an end and really releases solar from that burden that really helps nobody.

Exactly. Exactly. Anyway, congratulations on all the bookings and orders and look forward to following your story.

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

Thank you, everyone, for your time today, and for your interest in Amtech. This concludes today’s call.