Amtech Systems, Inc. (ASYS) Q1 2018 Earnings Report, Transcript and Summary

Good afternoon and welcome to the Amtech Systems First Quarter Fiscal 2018 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 would now like to turn the conference over to Mr. Robert Hass, Amtech's Chief Financial Officer. Please go ahead.

Thank you. Good afternoon and thank you for joining us for Amtech Systems First Quarter Fiscal 2018 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 2018, ending December 31, 2017. That earnings release will be posted on 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 and competitors; change in volatility and the demand for our products; 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 filings, including our Form 10-K for the September 30th year-end and Form 10-Q for the quarter ended December 31, 2017. 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 joining our call today. As a leading global supplier of solar and semiconductor production and automation systems, we continuously look to address our customers' priorities with market-leading technologies that support their objectives and provide the high level of quality and service possible. In doing just that, we are pleased to report sound Q1 results, which CEO Fokko and CFO Robert will discuss in detail. Our solar customers continue to look to next generation solar technology solutions. The timing of needed production line upgrades and expansions is customer-specific and causes variances in our period to period performance potential. However, working with each customer in their long-term planning, pursuing new customers, and reducing our structural cost, are the highest priority for us and the foundation upon which we expect to grow over the long-term as a leading provider of next generation technology solutions to the growing global solar market. Our semi business complements our solar business well. Three years ago, in planning for the long-term Amtech completed the acquisition of BTU International. It gave us the opportunity to drive growth in our semi business, increase scale and shape a more consistent cash flow stream. For semi, the continuously expanding mobility and power market and trends in the Internet of Things have become important contributors to that improved cash flow, and we believe that those end markets presents ongoing long-term opportunity for our business. Now, I will turn the call over to Fokko, who will discuss results, our business operations, and outlook. Fokko?

Thank you, J.S. Good afternoon to all who are joining us today for this discussion. J.S. pointed to the value of our diversified business model, semi and solar. That value is clearly demonstrated in our first quarter financial results and outstanding record top line performance of over $73 million in revenues. In our solar business, we shipped Phase II of a large turnkey project and have continued strong performance from our semi and polishing businesses. We are pleased with our results and the efforts of our global team to deliver high-value products and services to our customers, and we would like to thank all of our stakeholders around the globe, our customers, our employees, our business partners, and our shareholders, for making this happen. During the December quarter, our semi and polishing business outperformed our expectation, coupled with strong revenues in the quarter of $24 million with even stronger bookings of approximately $30 million, resulting in a book-to-bill ratio larger than 1. This is the second consecutive quarter of revenues over $24 million. Our semi business reflects the increased demand from the evolving mobility, automotive and power markets. We look for that to continue. So our business mix is good as our semiconductor and polishing business continues to help balance out our operating results of the solar business where order flows is inherently lumpy. For our solar business, we shipped over $50 million in the December quarter, tremendous execution by our solar team. Installation of our turnkey project is going well and meeting customer's expectation. Timing of the next phase orders expected was in the next few months. Solar bookings were clearly light in the December quarter. There continues to be increased competitive pressure on selling prices, primarily driven by the Chinese equipment manufacturers that offer lower prices, coupled with liberal payment terms and localized service. We remain confident we have superior technology, yet we are seeing more often that the competition can win with a lower price, making it more difficult for us to win orders. Our cost position is a constant focus of ours and with a dedicated effort by our global team we have enhanced our operation and process and expect to continue to make the needed adjustments to help us compete. For example, the migration to more of an outsourcing model is working well and contributed to our operational success in the December quarter. We are using high-responsive contract manufacturers for large portions of our machines. Our internal team fully controls the final assembly of the machines. Importantly, this model can give added pricing flexibility which is required in the current operating environment. However, we need to do more and therefore we will continue to make the needed adjustments to best align our operations to compete when the marketplace changes. We continue to do more strategic sourcing of components and study the possibility of outsourcing manufacturing of some of our key solar projects in lower-cost locations such as China. A few words on the new U.S. tariffs and solar imports, the level of the tariffs and the uncertainty of which countries would be exempt caused many of our customers to delay their expansion plans outside of China. So there is still uncertainty as to if and where expansions will occur. We are well positioned to work with them as they analyze and execute their forward plans. And now Robert will go over the quarter's result in more details. Robert?

Thank you, Fokko. Let's now review our first quarter fiscal year 2018 financial results. Net revenue in the first quarter was $73.6 million, compared to $54.7 million in the fourth quarter of fiscal 2017 and compared to $29.1 million in the first quarter of fiscal 2017. This sequential increase is due primarily to the shipment of all the equipment for Phase II of the solar turnkey order, compared to shipping one cell line of Phase I in the fourth quarter of fiscal 2017. Increased demand for our polishing templates also contributed to the increased revenue in the first quarter. The increase from the prior year first quarter is due primarily to shipments related to Phase II of the sonar turnkey order as well as increased shipments of our semiconductor equipment and sales of our polishing templates. Net income for the first quarter of fiscal 2018 was $6.5 million, or $0.42 per diluted share, compared to a net loss of less than $100,000 or $0.00 per share for the first quarter of fiscal 2017 and sequentially net income of $7.3 million or $0.51 per diluted share. Unrestricted cash and cash equivalents at December 31, 2017 were $52.7 million compared to $51.1 million at September 30, 2017. At the end of December 2017, our total order backlog was $65.9 million, of which solar accounted for $39.3 million, compared to a total backlog at September 30, 2017 of $102.4 million, which included $81.4 million of solar backlog. Backlog includes deferred revenue and customer orders that are expected to ship within the next 12 months. Now, I will get to the changes in gross margin and certain categories of expense. Gross margin in the first quarter of fiscal 2018 was 28%, compared to 36% in the preceding quarter and 29% in the first quarter of fiscal 2017. Sequentially, gross margin decreased primarily due to $2.1 million revenue deferrals in the first quarter of 2018, compared to the recognition of $1.5 million previously deferred profit in the fourth quarter of fiscal 2017. Additionally, less usage of previously reserved inventory and sales of lower-margin products in our semiconductor segment also contributed to the sequential decrease in gross margin. Compared to the prior year, gross margin decreased slightly on higher sales volumes due to a lower margin product mix and a deferral of profit in the first quarter of fiscal 2018 compared to recognition of previously deferred profit in the first quarter of fiscal 2017. Selling, general and administrative, SG&A expenses in the first quarter of fiscal 2018 were $10.6 million, compared to $9.8 million in the preceding quarter and $7 million in the first quarter of 2017. Sequentially, the SG&A increase was due primarily to increased commissions and freight related to the higher revenues, partially offset by lower employee related expenses. The increase in SG&A from the prior year quarter is due primarily to higher commissions, freight and other selling expenses, and the three months ended December 31, 2016 also included the collection of previously reserved accounts receivable of approximately $1 million. Research, development and engineering expense was $2 million in the first quarter of fiscal 2018, compared to $1.8 million in the preceding quarter and $1.6 million in the first quarter of fiscal 2017. Income tax in the first quarter of fiscal 2018 was $1.2 million, compared to $0.5 million in the preceding quarter and $0.1 million in the first quarter of fiscal 2017. Now, let's take a look at our view for the coming periods. The Company expects revenue for the quarter ending March 31, 2018 to be in the range of $26 million to $29 million. Gross margin for the quarter ending March 31 is expected to be in the mid-20% range, with operating profit slightly negative. 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 businesses. The results for the second half of fiscal 2018 will be significantly influenced by the timing of the Phase III order of the 1 gigawatt turnkey project. 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 product6ion lines, 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 relationship to the United States dollar could cause actual revenues to be lower than anticipated. I now would turn the call over to the operator to start the Q&A portion of our call. Operator?

[Operator Instructions] Our first question comes from Philip Shen with ROTH Capital Partners. Please go ahead.

Congrats on the nice results. I wanted to kind of talk about the Phase III order, do you have a sense for – I think you guys touched on this, but can you give us a little bit more color of timing, if possible? And also, how is the Phase I equipment operating? Is the customer happy, is everything – or are the efficiencies being delivered as expected? And the Phase II's operating, perhaps you could share some color on that? And does the Phase III order depend on the performance of the Phase I and II operations?

I can give some input. I was at this customer just a few weeks ago and Phase I installation is mostly finished. There is always work to be done in ramping up, but so far going really well. The Phase II still needs installation. Some of the shipments and customs took a little bit longer, outside of our control, but all in all, especially the Phase I install and the ramp-up is going really well, the customers – we meet what they expect. It's not that I can say that – the efficiencies we are still working on that, but this is not the first time we do a project like this with this technology, so there's no issue with that, just a direct relationship to it. Of course, it makes a lot of difference, and I think I also said it in the last call, but when you see machines running and a process running, it's a lot easier to make the decision on the next step. So, in the remarks I gave earlier, I said the next phase is in the next few months, and that's pretty much as much as I can say right now on that one.

Okay, that's fair. We were just looking for the additional color, so thank you.

Yes, the performance looks good, so it's going well, so really good.

Good. Thanks Fokko. Shifting to the semiconductor business and polishing, can you share what the outlook is for these segments? I think seasonally part of the reason why guidance built in a touch light is the seasonality of Chinese New Year. But beyond that, how does the business look for calendar Q2 and Q3? On a year-over-year basis, are you getting the sense that there could be growth in 2018 calendar year versus calendar year 2017? So, some color on the outlook there? Thank you.

That's what it definitely looks like. As I already said, we had a couple of quarters where we had high shipments and the bookings are really good, especially in our first quarter, and we don't necessarily see that stop. So we do definitely believe that the BTU or let's say the semi electronics business will do definitely better than last year. Of course the year has still just started but it really looks good and they booked also some longer-term projects. So, I wouldn't say that for the reflow the timing of course is short from order till shipment, but some of the high term there's a bit of a longer, and that's really filling up well for the rest of the year. So that looks good. And the polishing is the same. They've been really having a really good first quarter, and also there we don't see things really slowing down, more the opposite. So, also there we believe we could have a really, really good year. So, you never know what semi does and things can change, but for now for all of the semi business and definitely also for the polishing, we look to very good chance to have a real good year.

Yes, the polishing is a book-and-ship type of business, but it really looks good, it has new products which has helped team to drive the growth.

Great. So to put kind of finer points on all of that, I think bookings in the past couple of quarters has been light, so looking ahead given some of this visibility that you have and some of this progress you are making, do you get the sense, can you give us a sense for what the bookings will look like ahead, do you get the sense that bookings may outpace revenue as we get past this trough-ish potential FQ2 period?

Of course with the solar bookings is lumpy – and first of all the turnkey makes a huge difference, and besides that, if there is projects you get, these projects tend to be a little bit bigger, if you don't get them, you don't get a lot. So, there is a lot more, the semi and polishing is a lot more stable growth, but depending on the timing, I said a few months and is it impossible this quarter that we get a next phase, that's not impossible at all, we hope for that, but a quarter ends at a certain date and we only book those orders if they are 100% certain. So, that sometimes takes a little bit longer than you'd really like, but all-in-all I think it looks quite positive.

I would agree.

Great. Okay. Fokko, Robert, thank you very much. I'll pass it on.

Our next question comes from Jeff Osborne with Cowen & Company. Please go ahead.

I had several, so you can keep your answers brief. So I get it you don't have visibility on the order, but can you just talk about the customer in general, have they sold any of the output of this plant, are they exposed to the U.S. and Section friend 201 that might delay their…

No, it has nothing to do with export to the U.S. It is really local, mostly for what we see as a captive one where they supply to their own [indiscernible]. But no, we don't see any risk of that having any influence on the U.S. at all.

Okay, that's good to hear. So, Fokko, you also mentioned some pricing pressure in the market, which has been the case for years, and looking at subsystems and final assembly I believe in Holland. But can you just talk about if this were, maybe a baseball game is a bad analogy for you, but a soccer match out of 90 minutes, where are you in that transition of moving production or having a more flexible assembly process? Just I want to make sure that that's not going to cause any disruption should this order appear in a few months.

No, there is no disruption at all. That means if you do multi-phase in a major order, you also do pretty much a copy X to X, you build it in the same way. All of the outsourcing is done mostly of course in the Netherlands with [indiscernible], there's a lot of this type of work for many U.S. and European companies and also in some other places. So, that outsourcing is not affected and if we start to do outsourcing more in Asia, that will take a little bit of time, it would not affect what we do today, not at all, because of course you have to provide the same equipment, same quality, and also the time between getting the order and shipping shouldn't be too long and it should be the same type of equipment. So there is no risk of not being able to supply that.

Good to hear. Two other quick ones here, maybe for Fokko or J.S. Cash balance is obviously very high here, especially as a percentage of your market cap. Do you have a shopping list of things you are looking at from an M&A perspective or what's the strategy there?

If you look at the history of Amtech and how we are here today from decades overall, we have that activity in our team. So, we always do have a few lists of prospects on our hand and nothing definite but that's our ongoing work.

Understand. And then the last one maybe for Robert, and this may be buried in the 10-Q, I haven't gone through or the file didn't come yet, but can you just talk about the solar backlog, in particular how much of that is deferred revenue attributable to the first two phases of the turnkey customer? And can you remind us, upon installation, so it sounds like Phase I is installed, what's the usual time lag of when that deferred would flow through the P&L?

So, for the turnkey there's three points at which that deferred gets released, what we call [FAT1, FAT2, FAT3] [ph], and so that timing, so that will be released over time but we generally do not break out deferred revenue, deferred profit from the rest of our backlog.

Is it a safe assumption to say that the bulk of the backlog is attributable to the turnkey customer and not some other mystery customer that has hopped onboard to buy diffusion furnaces or any other product?

Certainly less than half. 19% is deferred.

Got it. So, can you just talk about the rest of the solar backlog, like I think that's been one of the industrial fears of getting involved in the stock is just the exposure to one mystery customer, so has there been any progress in terms of customer diversification in the quarter?

The backlog is based on several different customers, not any one, just one customer. There is one a little bit larger than the other, but that's typical.

Got it. Thank you.

Our next question is from Mark Miller with Benchmark Company. Please go ahead.

We saw some strengthening in the euro. I was wondering what impact, if any, that had on your sales for the previous quarter.

The orders, particularly the solar is all in euro, so that definitely helps a bit because then for the same euros you get a few more dollars in revenues and profits. So that helps. I mean the semi business and polishing is all dollars. So, I said this quarter 40% is dollar, 60% euro, and the euro helped us here because if you're in a profit position and a revenue and profit, it does help us now when the euro is a little bit stronger.

So, are you able to estimate how the appreciation of the euro, the strengthening of the euro, how that boosted your sales? Was it a couple of million?

I don't have that number. We can try to get that off-line.

Again, one of the difficult things is trying to estimate in terms of your sales because of the deferred revenues. Can you estimate how much of the backlog at the end of 2017 will be recognized in revenues this quarter?

It all depends on – net deferred revenue is made up of a number of different customers, a number of different orders, and each one is unique as to the acceptance requirements, and it will just be over the next few months. Sometimes there will be more than others but…

Yes, like the turnkey. Robert already explained it. Also you have to deal with startup and process, but then also you got to improve yield and the total throughput of the total line, and that may take six to seven months before that part is coming along. So that is spread out over a longer period of time, but that's not a huge portion, but it takes a bit longer.

Just going from your revenue guidance for the current quarter of 26 to 29, and then what you did in terms of the sales during the quarter, not from deferred in the prior quarter, it looks like very little of that backlog is expected to be recognized just using that type of thinking.

As we said, about 19% of that is that will be recognized over the coming quarter.

Your unrestricted cash went down significantly. What was the cause of that sequentially?

I'm sorry, would you ask that again?

Your unrestricted cash declined significantly over the last quarter. Your restricted cash, I'm sorry, declined sequentially over the past quarter. I'm just wondering what was going on with the cash. And also, could you provide the cash used by operations or generated?

So, the cash used by operations…

But the restricted cash of course is being used when you ship, it goes from restricted to unrestricted and that's where you pay your bills from. So the restricted cash was just the down-payment that gets unrestricted when you start shipping.

And what was the cash used by operations prior quarter?

It was basically zero, $263,000.

Okay. Thank you.

Your next question is a follow-up from Jeff Osborne with Cowen & Company. Please go ahead.

Just one real quick one here back on the deferred revenue topic, can you remind us, Robert, when the deferred flows through the P&L for solar in particular, did you expense all of the cost associated with that and so it's higher margin as deferred flows through? From my memory, I thought that was the case when Yingli was a big customer years ago, but I just want to get a refresher on how deferred flows through the P&L and then what the gross margin impact of that is.

Right. Certainly, most of the costs are already incurred. There are still the costs to install and get acceptance. But generally there is a higher margin on the deferred profit.

So, from a generic standpoint is it safe to say that kind of a mid-20s gross margin was what the kind of upfront portion of the turnkey solar piece was, and then it would be something higher than that as that portion of solar flows through over the next quarter too that doesn't have equipment shipments assigned to it?

That would be our expectation, yes.

Got it. Thank you.

At this time, I'm showing no additional questions, so I would like to turn the conference back to Mr. Robert Hass for any closing remarks.

Thank you. Thank you for your time today and for your interest in Amtech Systems. This concludes our call today.