Amtech Systems, Inc. (ASYS) Q4 2017 Earnings Report, Transcript and Summary

Greetings, 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 also note that this event is being recorded. I would now like to turn the conference over to Mr. Robert Hass, Amtech's Chief Financial Officer. Please go ahead.

Thank you, Andrea. Good afternoon and thank you for joining us for Amtech's Fourth Quarter Fiscal Year 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 fourth quarter of fiscal year 2017 ending September 30, 2017. That earnings release will be posted on the Amtech's Web site 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; competition from Chinese equipment suppliers; 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. We encourage you to read the more comprehensive description of the risk factors relating to Amtech's business detailed in our Securities and Exchange Commission filing on Form 10-K. I will now turn the call over to J.S. Whang, our Executive Chairman, to begin the discussion. J.S?

Thank you, Robert. Welcome to our discussion today. As always, we appreciate your interest in Amtech. The long-term opportunity for solar is validated every day across many regions of the world, it is a large global industry with growth characteristics that go well beyond what we have seen to date. There is a continuously growing number of sizable projects. There are local, state, and federal agendas supporting solar in the near-term and longer-term. Solar has been validated as a vital renewable energy solution. It effectively addresses a broad array of economic sustainability and other key social issues, and we are pleased to bring distinguishable technologies to the industry. As you likely know, U.S. trade officials are currently discussing import caps and/or tariffs to improve the competitive position of U.S. solar companies relative to that of Chinese manufacturers. If import caps are put in place or tariffs levied, we believe Amtech is uniquely positioned to explore those opportunities having operated in the U.S. I am very proud of our global team. Over the last couple of years, we have streamlined our business, improved our cash flow growth potential, and have returned our business to profitable growth. Amtech's Solar business achieved a historic performance, and our Semi and Polishing businesses’ successful product innovations and operating efficiencies led to outstanding results. We are playing a key role in advancing the industries as we bring to market next-generation solutions to increase solar cell efficiency and higher semi equipment performance. Our new products and technologies are recognized as an industry leading solution and we now look to continue to progress in 2018. I will now turn the discussion to our CEO, Fokko Pentinga. Fokko?

Thank you, J.S. You all have seen in our press release our fiscal year 2017 results show much year-over-year improvement with strong bookings producing improved revenue and profitability. We wrapped up the fiscal year with all three of our business segments delivering positive earnings in the fourth quarter. We are also pleased that our Solar and Semiconductor business units delivered sequential quarter-to-quarter and year-over-year improvements in both revenues and profitability. Let me provide an update on the status of our large turnkey order for this one gigawatt facility in China. First lines of Phase 1 shipped in fiscal 2017. First line of Phase 2 has now recently been shipped also, and the second line is expected to be shipped by the end of this quarter. Therefore, we expect strong fiscal year '18 first quarter performance from our solar businesses. Our team is now on-site, and installation has begun. This is an exciting time for us and for our customer as this project moves forward. We are working side-by-side with this key customer, partnering with them as they plan and execute each of the different phases by building this large facility. For us, timing of orders is dependent on many customer-specific planning and implementation factors. Phase 1 and 2 represent about one-half of the one gigawatt faciltiy , so we look forward to the next step in this multiphase program and its potential contribution for the second half of this fiscal year 2018. For the general solar market, we continued to face strong competition from Chinese and European solar equipment suppliers. Each day, we look for ways to build upon our many strengths and improve our competitive position. Our goals are many, innovation, responsiveness to our customers, enhanced profitability, and value-driving growth, reducing our structural cost, including the cost of our equipment is critical to achieve these goals. As you know, this is a business that fluctuates quarter-to-quarter with timing of orders, which for the most part is determined by our customers' technology roadmaps and project plans. This requires or operations to be flexible and nimble in order to best serve our core customers. One way by which we are achieving that flexibility is through outsourcing. Fiscal 2018, we continue to transition further to an outsourcing model where the majority of modules used to build a complete system are being outsourced to contract manufacturers, and we work hard to improve our supply chain capabilities in order to reduce our material cost. We also study possibility of outsourcing and manufacturing some of our key solar products in lower-cost locations such as China. Our Semiconductor segment produced both good volume and margins in this quarter, reflecting solid demand in the broader semiconductor packaging and electronics assembly marketplace for our reflow ovens and diffusion furnaces, and as a result this segment had a very good quarter. We continue to make targeted investments in the semi product improvements and new features that are being well received by our customers in order to remain a leading supplier in the markets we serve and ensure our semi business continues to be a steady contributor to our overall business. Also this quarter, our Polishing business continued to provide good margins and profits. They continue to do on a very consistent basis. In summary, we saw increased activity in our businesses in fiscal year 2017. We returned to profitability in the third quarter, and had higher profitability in the fourth quarter of 2017. We continued to increase our overall operational efficiency in our Solar business. And in our Semi business we have consolidated our footprint, improving our capacity utilization, and sharing our certain facilities and functions. Our operations are laser focused on the defined priorities of our customers. Now, Robert will review our financial results in more detail. Robert?

Thank you, Fokko. Let's now review our fourth quarter fiscal year 2017 financial results. At September 30, 2017, our total order backlog was $102.4 million, of which Solar comprised $81.4 million, compared to a total backlog of $125.7 million at June 30, 2017, of which Solar comprised $98.2 million. Backlog includes deferred revenue in customer orders that are expected to ship within the next 12 months. Net revenue for the fourth quarter of fiscal 2017 was $54.7 million compared to $47.8 million in the preceding quarter, and $42.4 million in the fourth quarter of fiscal 2016. The sequential increase is due primarily to increased shipments of our semiconductor equipment. The increase in the prior year quarter is due primarily to shipments relating to a large solar turnkey order, as well as increased shipments of our semiconductor equipment. Gross margin in the fourth quarter of fiscal 2017 was 36% compared to 32% in the preceding quarter, and 29% in the fourth quarter of fiscal 2016. Sequentially, when compared to prior years, gross margin increased primarily due to higher sales volume, favorable product mix, and customer mix, and the recognition of previously deferred profits. Selling, general and administrative expenses in the fourth quarter of fiscal 2017 were $9.8 million compared to $10.1 million in the preceding quarter and $10.3 million in the fourth quarter of fiscal 2016. Sequentially, SG&A expense decrease was primarily due to lower severance and employee-related expense. The decrease in SG&A from prior year is due primarily to $1.8 million provision from doubtful accounts receivable in the fourth quarter of fiscal 2016. The fourth quarter of fiscal 2017 included increased commissions in selling expenses on higher sales and higher employee-related expenses. Research, development and engineering expense was $1.8 million in the fourth quarter of fiscal 2017 compared to $1.4 million in the preceding quarter, and $2 million in the fourth quarter of fiscal 2016. Depreciation and amortization in the fourth quarter of fiscal 2017 was $0.6 million compared to $0.6 million in the preceding quarter, and $0.7 million in the fourth quarter of fiscal 2016. Income tax in the fourth quarter fiscal of 2017 was $0.5 million compared to $1.0 million in the preceding quarter, and $1.1 million in the fourth quarter of fiscal 2016. Net income for the fourth quarter of fiscal 2017 was $7.3 million or $0.51 per diluted share compared to a net loss of $0.3 million or $0.02 per share for the fourth quarter of fiscal 2016 and net income of $3.3 million or 25% diluted share in the preceding quarter. Unrestricted cash and cash equivalents at September 30, 2017 were $51.1 million compared to $39.2 million at June 30, 2017. Now I will review the outlook. The company expects revenue for the quarter ending December 31, 2017 to be in the range of $60 million to $70 million. Gross margin for the quarter ending December 31 is expected to be in the mid-20% range with operating margin being in the single digits mid single digits both instruments by product mix. The solar and semiconductor equipment industries can be cyclical and inherently impacted by changes in market demand. Additionally, operating results can be impacted by the timing of orders, system shipments, and the financial results of the solar and semiconductor business. The first quarter of fiscal 2018 ending December 31, 2017 is expected to be positively impacted by the solar business due to the shipment of all Phase 2 equipment of the large multi-phase turnkey order, followed by softer second quarter shipments and operating results. Depending on the timing of the order for the next phase of the turnkey project, the results for the second half of the year potentially may be in line with the first half of the year. Operating results could also be affected by the net impact of revenue deferral on shipments and recognition of revenue based on customer acceptances and progress on the startup of the turnkey production lines, all of which can have a significant effect on operating results. A substantial portion of Amtech's revenues are denominated in euros. The revenue outlook provided in this press release is base 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 United States dollar could cause actual results to be lower than anticipated. I will now turn the call over to the operator to start the Q&A portion of our call.

We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Jeff Osborne. Please go ahead.

Hey, good afternoon guys. Congratulations on the strong results and the outlook. Do you mind just going over the mechanics of the first and second quarter comments there? I completely understand on the additional follow-on orders and the timing there that might impact the second half of the fiscal year, but if you could just repeat what you were talking about for the next few quarters would be helpful.

So again we're going to ship all of Phase 2 in fiscal 2018 first quarter. Then we're expecting a soft quarter in Q2, and then depending on the timing of the next phase of the turnkey order, the second half could be in line with the first half of the year.

Got it. And is there a rule of thumb on the deferred portion of this turnkey order as to when that would come in, so Phase 1, let's say it's the June or September quarter would've been in place for nine months or so. What's your experience been in the past on when that would come in, because that would have a pretty meaningful impact on gross margins? So could it be the case of the second half of the fiscal year the revenue might be certainly subdued relative to where we're at now but the gross margin level could be considerably higher?

Well, the gross margin on the deferred portion of the revenue related to turnkey for the installation, the startup, and meeting the other requirements in the contract, those margins are roughly the same. And those are being recognized ratably over what we expect to be the installation and final acceptance period.

If I'm hearing you right, there was a change to the way you structure contracts relative to the way Yingli years ago flowed through the P&L, is that correct?

So Yingli was not a true turnkey project. They accepted responsibility of taking the equipment and making sure they got the efficiency they were looking for.

Got it.

In this case, we're responsible for all the equipment, Tempress' equipment, and third-party equipment, the installation, startup, and meeting the final acceptance criteria of the order.

Okay, and you said…

Because of higher – the greater responsibility on the turnkey than we would on a standard equipment order.

Got it, makes sense. I just had two other quick ones here. Can you just touch on the revenue diversification or lack thereof within the Solar segment? Are you having any success beyond this -- the turnkey customer that you've alluded to in the past six months in terms of other peoples' shift to higher efficiency monocrystalline solutions?

Well, hi, Jeff. This is Fokko. And first with this turnkey project we're of course looking at more, but we first need to make sure that we do this one right. So -- and don't expect anything major on that area. But on the general equipment, like I said, it's relatively difficult to compete with the local equipment. And yes, we do have a success here, but we also lose quite a bit, so the combination of the turnkey and the single equipment that this is a good mix for us at the moment. But a majority of it at the moment is in the single equipment. For example, I think we will have some good potentials also in the PERC. Nothing compared maybe to Meyer Burger who had a large market share, but also there we see a potential that comes to fruition. So there is also in that area of the business, same for what we call the polysilicon LPCVD processes. But these are not mainstream yet, so the volumes in that area are still relatively small. But for some time later on in this fiscal year, also lot more potential that might come up here in the U.S, so we're still optimistic in that area.

It's great to hear that. The last one I had was just on the semi side. Should we anticipate the same seasonal weakness that I think we've seen in the past in the March quarter with Chinese New Year and just CapEx cycle, so a strong December quarter, and then down in March, and then maybe an uptick in June through the rest of fiscal year?

Generally that's what you see, but it's never a fixed rule. But yes, Chinese New Year certainly always has a bit of an effect . And the other side, it also makes a lot of demand, so there is a cyclical thing that second quarter always is a little bit slower.

Got it. Thank you.

Thank you.

Our next question comes from Philip Shen of ROTH Capital Partners. Please go ahead.

Hi, thanks for the questions. Congrats on the nice results. The first question we have here is how do you expect your book-to-bill ratio to trend into fiscal Q1 and as we go through this coming fiscal year for both the company as well as for solar?

Well, you saw that in the last couple of quarters, Q2 and Q3 were very high book-to-bills, and Q4 was low. So what Q1 will be, we'll know when everything of Q1 is all said and done. But that will, especially these bigger projects, that's very lumpy. So both the shipments are lumpy, and the orders come in lumpy. So that's the downside of having these larger projects because they make the book-to-bill go up and down. So far, with the shipments over the last three quarters or the last two quarters and this -- the guidance we gave for the first quarter. So we have three good quarters in a row that's already better than we've had in a long, long time. So if you look at the Semi, it's a lot more stable, but also there in the semiconductor, real semiconductor the oxidation diffusion furnaces also often they come a little bit lumpy. So you won't really see a very stable book-to-bill. It's going to jump and down with the big orders and big shipments.

Okay, thanks. And I know PERC is an opportunity for you guys. Was wondering if you guys could comment on how you expect your market share to possibly trend in 2018. I mean, do you see some growth there and some line of sight to some opportunities that might be near-term given the adoption that the industry is seeing in PERC in general?

Yes, as I said, the adoption and projects near-term, there's not going to be huge projects, but the low single-digit orders of ALD machines and PECVD certainly are possible, and we are working hard on that. And I think we have a really, really good set of equipment. But then again, we all know that so far the in line Meyer Burger are taking lead already for quite sometime. So it's fighting that back into that is not that easy. On the other side, you know, I think what we had seen in some of our consumers that efficiency is really good is what we did. And so, we certainly have opportunities there, but it's a lot of work and it's not easy, but we have the good tools, and working hard also to reduce the cost of those tools in order to come up with better deals, better packages for our customers.

Great. Thanks, Fokko. One more here, on the semiconductor side, can you just comment in general as to kind of where you think we are in the semi cap spending cycle, how long do you think you could last for example, and what inning do you think we are now?

Well, you got to look semiconductor as you may know we put all of what BTU does in semiconductor, and that's really on the back-end side, on the reflow soldering, so that's really related to iPads and what have you. So that is very much related to that. If you take Bruce [ph] technology, it's more on the power area and analog, and I think that's still -- that's going to continue to grow strongly, because of all of the -- whether it is automotive or solar [indiscernible] and everything is going to be electric in time to come. So I think there is a lot happening there. And again, as I said, also on the general assembly side and the soldering, it depends a lot also how business goes here for all the electronic product manufacturers, and how Christmas goes here, there is a lot to do with how much of those components are sold, but in general, everything is growing. So we don't necessarily see -- I do not know if there is just a couple of innings, I think especially in power it's a constant growth.

Great, thanks, guys. I'll pass it on.

Okay, thanks. Thanks for the questions, Phil.

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

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