Amtech Systems, Inc. (ASYS) Q3 2018 Earnings Report, Transcript and Summary

Good day, and welcome to the Amtech Systems Third Quarter 2018 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Robert Hass, Chief Financial Officer. Please go ahead, sir.

Thank you, Jeff. Good afternoon, and thank you for joining us for Amtech Systems Third Quarter Fiscal Year 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. Also participating today are Lisa Gibbs, Amtech's Vice President and Chief Accounting Officer; and Michael Whang, our Vice President of Operations and Chief Information and Risk Officer. After the close of trading today, Amtech released its financial results for the third quarter of fiscal year 2018 that ended June 30, 2018. That earnings release will be posted on the company's website at amtechsystems.com. Today's -- 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 demand for our products; the effect of change in 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 our Form 10-K and Form 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 joining our call today. Over time, we have emphasized the value of our diversified business model. Our thermal processing technology and equipment serving the semiconductor market and our LED/silicon carbide businesses are delivering strong year-over-year growth and cash flow as we benefit from strong demand and the growth in the marketplace. Our semiconductor businesses are selling into established and growing markets for power IC, sensors, consumer and industrial electronics and automotive; as well as revolutionary technology segments, such as autonomous vehicles and the Internet of Things. Our LED/silicon carbide business is also selling into growing markets, such as advanced lighting, power and silicon carbide. We are excited to be participating in the growing global semiconductor industry. Now regarding our thermal processing technology serving the solar industry, China, which represents half of the global solar market, recently adjusted their national solar targets and policies, significantly lowering their target of solar installations. These changes have certainly contributed to a slowdown in our customers' near-term expansion plans. However, the push for higher efficiencies and the strategic need to diversify the global energy supply will continue to fuel the longer-term growth of solar. We are confident that we are recognized by our customers as a key technology provider, and look forward to our continued participation in selective special growth opportunities. With our large n-type high-efficiency turnkey solar order, our solar revenue reached $76 million in the 9 months ending June 30, 2018. We believe our two attractive growth markets, semi and solar, will serve our shareholders well in the longer term. Now Fokko will discuss the current operating environment for our businesses. Fokko?

Thank you, J.S. Welcome to our discussion today. As always, we appreciate your interest in Amtech. Today, we are pleased to report that our semiconductor and LED/silicon carbide polishing business segments are doing very well, producing both good volume and margin results and record revenue and operating profits. The strong performance is supported by the underlying market demand for semiconductor products, electronics, or the sensors in power devices. BTU's reflow business is growing strong, and we have some newly introduced products that are being well received by our customers. PR Hoffman is also performing well in the LED and silicon carbide/polishing sector, providing strong value to its customers, especially those in the advanced lighting and silicon carbide industries. Our business -- businesses are closely aligned with the global economy, and with the improvements that we have been seeing, we anticipate we will transition at the end of this quarter to fiscal year 2019 with strong -- continued strong revenue, value-enhancing margins and consistent cash flow in both our semi and LED/carbide businesses. We look to continue to invest in product developments and maintain our position as a leading supplier of products and services in the diversified customer base we serve in this businesses. Tariffs take a key topic for many today but at this time, we are fortunate and that we expect minimal impact from the tariffs that we've been enacted so far. We will keep you updated as we continue to monitor this fluid issue over time. Now let's move over to solar. Our solar business is less predictable quarter-to-quarter, as order flow and revenue fluctuates with broad industry trends as well as of the timing of customer technology-driven expansions and production line upgrade plans, plus the solar industry is being challenged by factors outside of the control of Amtech or its customers. Like J.S. mentioned, the major challenge for our solar business at this time is the Chinese government's recent tariff reduction announcement shortly after the SNEC show in Shanghai in May of this year. This created additional uncertainties in an already highly competitive market, in which we are competing with local equipment manufacturers who are becoming more dominant. Due to these challenges, we are implementing a restructuring plan. The goal of the plan is to be better aligned with -- better align our workforce with the needs of our business, reduce operation cost and enhance our competitive position for the long-term success, while continuing to serve the production needs by additional outsourcing to handle peak shipments. We continue to develop our plans and strategies to manufacture in China to address the competition from local suppliers. These challenges in the market also give opportunities for new technologies like the n-type TopGun technology that uses specific context and use our low PECVD systems to make the polysilicon layers and also the Boron diffusion furnaces, where, in both, Tempress has much experience. Several top-tier manufacturers are currently reviewing this technology, with possible orders coming in the near future. While we expect that our quarterly and annually operating lease sales will continue to be impacted by the timing of large system orders, we look forward to work closely with our customers to address their near and longer-term technology needs. Now I'd like to update you on our turnkey project in China. During our last earnings call, we commented that we have just started our phase 1 and all machines were installed and operational. We have achieved the first 2 acceptances and are very close to the stage of showing efficiency and yield at production volumes. We expect phase 2 installation will start in a few months. This customer's fairly large 1 gigawatt project uses all of our equipment. Our current expectations are that the follow-on orders will come in the next few quarters, with the high efficient bifacial n-type production line, this customer is well positioned to be a primary supplier in the market and we look forward to work closely with them as they build out these production lines. And now Robert will review our third quarter financial performance review. Robert?

Thank you, Fokko. Let's now review our third quarter fiscal year 2018 financial results. Net revenue for the third quarter of fiscal 2018 was $41.2 million compared to $32.8 million in the preceding quarter, and $47.8 million in the third quarter of fiscal 2017. The sequential increase is primarily due to increased shipments of our semiconductor equipment. Compared to the prior year quarter, net revenue decreased due to lower shipments of solar equipment for the turnkey project, partly offset by significantly increased shipments in our semiconductor and LED/silicon carbide segments. Unrestricted cash and cash equivalents at June 30, 2018, were $48.7 million compared to $51.1 million at September 30, 2017. At June 30, 2018, our total order backlog was $41.2 million, with semi and LED/silicon carbide segments totaling $22.3 million, and the solar segment, $19 million, compared to the total backlog of $63.1 million, with semi and LED/carbide segments totaling $28.2 million and the solar segment, $35 million, at the March 31, 2018, quarter-end. Backlog includes deferred revenue and customer orders that are expected to ship within the next 12 months. As of June 30, 2018, we've excluded from reported backlog approximately $5.8 million of solar customer orders that are not expected to ship in the next 12 months. Gross margin in the third quarter of fiscal 2018 was 35% compared to 36% in the preceding quarter, and 32% in the third quarter of fiscal 2017. Sequentially, gross margin was relatively flat, with product mix changes increasing solar gross margin and decreasing semiconductor gross margin. Compared to the prior year quarter, gross margin on products from our solar segment increased due to recognition of previously deferred revenue, while gross margins on products from our semiconductor and LED/silicon carbide segments decreased due to product mix. Selling, general and administrative expenses in the third quarter of fiscal 2018 was $9.5 million compared to $9.5 million in the preceding quarter, and $10.1 million in the third quarter of fiscal 2017. The decrease in selling, general and administrative expenses from the prior year quarter is due -- primarily due to decreased employee-related expenses, partially offset by higher commissions and selling expenses related to higher revenues in our semiconductor segment. Due to the ongoing challenges we are experiencing in the solar segment, we are implementing a restructuring plan. Once fully implemented, we expect the plan to reduce operating costs by approximately $3 million on an annualized basis. The plan is to better align our workforce with the current needs of our business and enhance our competitive position for the long term. Under the plan, we will reduce our solar workforce by approximately 35 to 40 employees. We expect to record approximately $600,000 to $800,000 of related costs in the fourth quarter of fiscal 2018. Research, development and engineering expense was $2.1 million in the third quarter of fiscal 2018 compared to $2.2 million in the preceding quarter, and $1.4 million in the third quarter of fiscal 2017. Effective June 29, 2018, we sold our remaining 15% ownership interest in Kingston Technology Hong Kong Limited for approximately $5.7 million. We recognized a gain of approximately $3.1 million in the third quarter of fiscal 2018, and recorded a short-term receivable of $5.7 million. The note is due in August 2018. Income tax in the third quarter of fiscal 2018 was an expense of $1.4 million compared to a benefit of $2.8 million in the preceding quarter, and expense of $1 million in the third quarter of fiscal 2017. The tax benefit recorded in the second quarter of fiscal 2018 was primarily due to the resolution of an uncertain tax position. Net income for the third quarter of fiscal 2018 was $5.0 million or $0.33 per diluted share compared to net income of $3.3 million or $0.25 per share for the third quarter of fiscal 2017, and net income of $2.8 million or $0.19 per diluted share in the preceding quarter. Now let's take a look at our view for the upcoming period. Company expects revenues for the quarter ending September 30, 2018, to be in the range of $26 million to $28 million. Gross margin for the quarter ending September 30, 2018, is expected to be in the upper 20% to lower 30% range, with operating margin negative, partly due to expected restructuring costs in the third -- in the fourth quarter. 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, the net impact of revenue deferral on shipments, recognition of revenue based on customer acceptances and the financial results of solar and semiconductor manufacturers. The results of the coming quarters will be significantly influenced by the timing of phase 3 order of the 1-gigawatt turnkey project. Operating results could also be affected by the net impact of revenue deferral on shipments, recognition of revenue based on customer acceptances and meeting start-up milestones for 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 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 relationship to the United States dollar could cause actual revenues to be lower than anticipated. I will now turn the call over to the operator to start the Q&A portion of our call. Chad?

[Operator Instructions]. The first question will come from Jeff Osborne with Cowen and Company.

A couple of questions. Fokko, the tone -- obviously, solar is a tough neighborhood right now. But the tone on the call relative to the last call around the expansion had sort of shifted from months to quarters. Can you just talk about what led to that transition in your script? And then what the customer is experiencing? For example, as phase 1 kept getting up to full yield, is that on time? Is there any type of equipment issues that would delay the expansion? Or is that entirely market delayed -- or market-related?

Hi, Jeff. Well, yes indeed, there is a difference in tone from a few months to a few quarters. And really that happened after the, as I mentioned at SNEC, everything was still looking quite normal. And then shortly after that, there was this big change. And that has an immediate effect and -- for the timing and also for the market of the product. Especially for new start-up, a new company, that has a big effect. And how much that will be, this is what we think it is now. But of course, things can move relatively quick in that marketplace. It has no direct relationship to the start-up or any equipment issues, all the equipment is running fine. And there was some delay in having all the materials available because you need a lot wafers through production. And also, you need some orders to put that product in, so that combination, right after SNEC, gave a little bit of a hiccup but now I think all of that is cleared up. And as I mentioned, we are getting some more volumes, so you can probe the yield and efficiency of volume. Everything was -- all the equipment is just running fine. The facilities are doing well. The people that are running the machines, that means operators and technicians, everything's going well. But you need something to put it in, so you need to some customers and you need sufficient material to get volume. Because it's turnkey, we supply this at high volumes, so we also have to get that volume of wafers in order to probe it. And that's basically what's going to happen in basically next months. That all shall be completed for phase 1 and a month after, the installation of phase two starts. But the next orders, I'm not necessarily -- how about through that.

Got it, that's good to hear that the equipment's operational and working well. Yes, I had 3, I think, subtle accounting questions. But first of all, the charge $0.6 million to $0.8 million, is that all going to be in the G&A line? Or is there any in COGS? And then is there a cash portion of that as well?

So I'll take the last part of that question first. The cash, some of that will be fourth quarter, but some of the cash will be in the second -- the first and second quarter of fiscal 2019. Regarding the accounting, I imagine some of it will be in COGS.

Yes. I just wasn't sure with the 35 to 40 folks. Are these technicians that are doing more assembly in Holland and China? Or are these more researchers in R&D?

It's a mix.

Yes, it's definitely a mix, and of course, we continue to do the install on the turnkey. We continue to do our research and development. But as there is some delay and generally, in the market, everybody noticed, we also have to be proactive and make sure that we act now. And if we need to scale up again, we organize that with the outsourcing, and with the way we set up the company, we can also expand again and take to higher volumes as soon as that happens.

Makes sense. And then the $3 million in annualized savings, I assume that takes effect relatively quickly. Or is that more of a phased-in approach? And then the same question, is that a mix between cost of goods and OpEx as well, or more geared towards OpEx?

So that is -- let's see. How should I put that?

Should we just lower OpEx by $750,000, I guess, is what I'm asking? Or maybe $0.5 million for OpEx and $0.25 million of overhead and cost of goods? Just any direction...

So the $3 million will be spread between cost of sales and SG&A. Just as will be $600,000 to $800,000 be spread, just depending on the classification of the employee. And the $3 million savings will be staggered, some of it in the fourth quarter, some in the first and some in the second. And only after it's fully implemented will we see the full benefit of the $3 million production costs.

That's helpful. Just two other very quick ones. I noticed in the solar backlog, you had $5.8 million that wasn't going to come in over the next 12 months. I don't remember that from the last quarter, forgive me it if it was there. But assuming your customer pushed that out, can you just talk about the nature of that? Maybe why it wasn't debooked? Or what level of confidence that you have that, that will come through. So that's question 1. And question 2 was, you alluded to mix on the LED and silicon carbide side with gross margin. Then it looks like margins declined by about 700 basis point sequentially. Just given you're highlighting that business and even changed the name from polishing to LED and silicon carbide, which is helpful, can you just remind us of what the key products you sell are? And which ones, generically speaking, would be lower margin that would impact mix versus the higher-margin fees?

Yes. So the silicon carbide -- this LED/silicon carbide margin is affected by whether it's consumables, which are templates and carriers versus machines, which have a lower margin.

Got it.

And then on this one backlog, which we moved out. With the change in volume in solar and this particular customer wasn't 100% sure that we would be installing that in the next 12 months. But still believes definitely that the order stays intact and that will come possibly a little bit later. So that's why we thought it was prudent to just move it out and wouldn't be 100% sure to be in the next 12 months. So the products' still needed and the plan's still there and the order is still in place. But -- and with the changes in the market condition, just take a bit of extra precaution on that one.

Our next question will come from Philip Shen with ROTH Capital Partners.

This is Elihu on for Phil. For my first question, I just wanted to ask about your outlook for manufacturing expansion in India. Are you currently in discussions with potential customers in the country? And if so, can you discuss the conversations that you're having there in light of the recent taxes on cell and module imports and the overall support for domestic manufacturing in the country?

Well, we're not having any plans to manufacture in India. Our plan is to manufacture some of the products and especially the outsourcing of the products of Tempress mostly in China. China is where the customers are that are important for us. India is a big market, but for equipment production in India, that certainly comes in a much later stage in this industry. There will be a lot of people that may do panel manufacturing and maybe import sales from China, but we do not expect that equipment production in India will happen in the foreseeable future.

Okay. I see. Can you discuss how your customers' plans have evolved after the China's policy announcement? Like, who may still be adding capacity even with the weaker outlook in China?

Well, there's a number of relatively new companies. Just to mention a few, Tongwei and LONGi, that were still adding capacity. But a large number of other customers, the expansions will be more in the high-efficiency area. And the Top Runner Program, which is one of the subsidy systems in China, is asking for high-efficiency sales. And more even than before this change, that becomes very important for the top tier customers to be able to sell into that Top Runner Program. And that's also what I meant to say with this development and the technology that we support and also can supply in the turnkey, and I guess, that high efficiency. And that's why there is still quite a bit of potential in growth, whereas for the high volume at a very low cost, also our chances are a little bit lower because the equipment cost there is -- those production lines generally go for the local manufactured products. So this change for us has some difficult side, but also some very, very promising sides, where the emphasis will be more on the high technology and that's basically where our strength is. But it does take a little bit of time for people to make a change. This was just the end of May. And also, for, I think, all of our customers, it came as a bit of a surprise that this change came. But these days, you have more surprises, so everybody is taking care of them and handling the best way they can. So I think it also creates a lot of opportunities.

I see. I was wondering how you're seeing kind of customer concentration evolve? Are new orders coming from newer customers? Or more from existing customers?

Mike, can you do that?

This is Mike. We're seeing a mix. So our traditional customers are booking strongly as also winning some new customers as well.

Okay. So as you mentioned, you're looking to shift some manufacturing to China. In the past, you said it's a bit of a ways out. I'm just wondering how far along you are in the process. And so you mentioned that the trade was not really disrupting your plans, but I was wondering if you could kind of just expand on that?

So if you -- before any change to a outsource concept, let's say, a year, even more ago. So now the next step is to outsource in China. And we are working on that in two ways. First of all, the product that you're going to build in China needs -- you need a good documentation package in order to be able to do that. Because otherwise, the way you produce it in Europe, everybody sort of knows how it's been done and it's all in a language that everybody knows in the next door. But if you want to move that to China, it's a relatively complex product, it needs a better engineering documentation package. So that's what we spent a lot of time on, and that's also why the R&D, for example, is still relatively high. So that's an important factor that first needs to complete and that's finished in the next few months. And parallel to that, we are talking to several outsourced companies. They can produce this. But also, at the right price. So if you don't have a good engineering package -- documentation package, you can't build. If you don't build for the right price, it doesn't make sense. So all these things go together hand-in-hand. And I think by the end of the later part of this calendar year, we will have the first machines that are being -- could be built with our outsource companies. But it's important to do it right. I mean, there is a bit of low -- or whatever, you mention it in the industry anyway. So we make sure that we do it right. And if that takes months more, that's not the biggest issue. It has to be done well for the right cost, with the right partner. So first quarter of next calendar year, we expect to start to build our first machines over there.

[Operator Instructions]. The next question will be from Mark Miller with The Benchmark Company.

Just wondering if you could give us an estimate in terms of the time from the receipt of the next phase -- of the expecting next phase of the turnkey orders, when that will start generating revenues. Is that a quarter away or 2 quarters away from the receipt of the order?

The first machines generally would ship, I think, somewhere between 4 and 5 months after we get the order. So it's -- it cannot normally be within the quarter. It needs about 5 months before the first shipments go out.

So if it's a relatively same magnitude as the previous orders, that bump up in revenue would be spread over a couple of quarters, I assume, 2, 3 quarters from the turnkey [indiscernible]

Yes, that's what we would expected, that it's not all going in 1 because you also need to install it. And so yes, we'd expect the phase to be somewhat similar.

But you wouldn't have to go through any acceptance procedures because you've already installed similar equipment previously. Is that correct?

Yes. It is not that all of the equipments will be similar. We will -- the next phase will have some extra steps in there. But these are comparable systems, so there is no question about the equipment or how it's being put together. So now there is no major difference from these lines still compared to the ones that are already installed.

A number of firms supplying semi equipment had been compacted by some pushouts related to NAND. Is that having any effect in your outlook over the next couple of quarters?

Right now, we're not experiencing any pushouts.

Ladies and gentlemen, 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, Operator, and thank you for your time today and for your interest in Amtech. This concludes today's call.