Amtech Systems, Inc. (ASYS) Q4 2018 Earnings Report, Transcript and Summary

Good afternoon and welcome to the Amtech Systems, Fourth Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Robert Hass, Amtech’s Chief Financial Officer. Please go ahead.

Thank you. Good afternoon, and thank you for joining us for Amtech Systems, Fourth Quarter Fiscal Year 2018 Results Conference Call. On the call today are J.S. Whang, Amtech’s Executive Chairman; and Michael Whang, our Vice President of Global Operations and Chief Risk and Information Officer; and myself Robert Hass, Amtech’s Vice President and Chief Financial Officer. Also participating today is Lisa Gibbs, Amtech’s Vice President and Chief Accounting Officer. After the close of today’s trading Amtech released its financial results for the fourth quarter and full year fiscal 2018 ending September 30, 2018. That earnings release will be posted on the company’s website at www.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 the 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-Qs. I will now turn the call over to J.S. Whang, our Executive Chairman, to begin the discussion. J.S.

Thank you for joining our call today. By this time I’m sure all of you have seen our SEC filing announcing the departure of our CEO, Fokko Pentinga. I would like to start this call by thanking Fokko for his 24 years of service, leadership and dedication to Amtech. We wish him the best in his future endeavors. Now in addition to my role as Chairman, I will assume the responsibilities of CEO. Now let’s come to our operating updates. First Michael Whang will discuss our semiconductor and silicon carbide businesses. Mike.

Thank you J. S. Our thermal processing technology and equipment serving the semi market [Technical Difficulty] serving the advanced lighting and semi markets delivered strong year-over-year growth and cash flow. The strong results exceeded our original expectations for the year. [Technical Difficulty] advances on the path to autonomous driving, consumer and industrial internet-of-things; advanced lighting applications, artificial intelligence and the upcoming 5G era, which will require additional semiconductors such as silicon and silicon carbide power devices, MEMS and sensors. Although demand may have reached its cyclical peak in our fiscal year ended September 30, we remain highly enthusiastic about the long term performance of our semiconductor and LED/silicon carbide businesses and the cash flow they can generate. We are well positioned for the long term and fully expect a sustainable base level of participation in these markets through the cycles in the near and over the long term. Tariffs continue to be a topic creating some uncertainty in the marketplace and certain areas of our business are starting to be impacted. However we are working closely with our customers and suppliers to assess our supply chain [Technical Difficulty] the impact as much as possible. I will now turn the call back over to J. S. our Chairman who will cover the solar side of the business.

Thank you, Michael. First as I step into the role of a CEO, I want to point out that I am highly confident in the leadership team we have in place at all of our divisions. We fully expect this transaction from Fokko to me to be a seamless one. As a CEO my immediate focus will be on our solar operations and reassessing our strategy to profitably participate in the solar market through cycles. As we discussed on our Q3 earnings call, last August the Chinese government 531 announcement had a significant impact on market demand. We continue to experience the resulting slowdown in a number of our customers’ near term expansion plans and in China we continue to compete in a condition where local suppliers are able to offer equipment at lower average selling prices for mass production of solar cells. Even with these challenges in the solar market we see opportunity where Tempress has distinctive technologies and experience developing [Technical Difficulty] reliability and collaborating with the customers on new technologies. We received two large orders in the Q4 fiscal 2018 for our high efficiency N-type Systems. The combined value of this previously announced N-type order is greater than $11 million. Turning to our turnkey project in China, these customers plan was to quickly deploy their bifacial modules for utility scale projects within their local province. That has not happened yet and although we do not know the precise reasons why, we do know that it is not an issue related to our equipment and its performance. We have successfully completed Phase 1 projects and have conducted [Technical Difficulty] performance in line with our expectations and obtained final customer acceptance. We will be ready for assisting with reaching high volume productions once the customer is ready. At this time we are also waiting for Phase 2 installation to begin. We have no firm timeline on a start date and we believe at this point that installation might not begin before the second half of 2019. The timing and visibility of our Phase 3 order is still limited. The current market environment requires a ready to move forward positioning for when the market turns up and capacity expansion timelines accelerate. In the meantime, we will continue to manage our costs within this segment while ensuring we are ready to respond to customer demand. Now Robert will review our Q4 financial performance. Robert.

Thank you J.S. Let’s now review our fourth quarter fiscal year 2018 financial results. Net revenue for the fourth quarter of fiscal 2018 was $28.8 million compared to $41.2 million in the preceding quarter and $54.7 million in the fourth quarter of fiscal 2017. The sequential decrease is primarily due to decreased shipments of our solar and semiconductor equipment. Compared to the prior year quarter, net revenue decreased due primarily to lower shipments of solar equipment for the turnkey project. Our semiconductor shipments are experiencing quarter-to-quarter variability based on the timing of orders and preferred shipment schedules for one particular customer. During fiscal year 2018, revenues were $176.4 million, a 7% increase over the previous fiscal year and the highest revenues since 2011. Unrestricted cash and cash equivalents at September 30, 2018 were $58.3 million compared to $51.1 million at September 30, 2017. Pursuant to our previously announced stock repurchase program, during the quarter ended September 30 2018 we completed our $4 million stock repurchase plan and repurchased 771,149 shares of our common stock. All shares repurchased were retired. On November 27 2018, [Technical Difficulty] approved stock repurchase program pursuant to which the company may repurchase up to $4 million of its outstanding common stock PAR value $0.01 per share over a one year period. At the end of fiscal 2018 our cash reserves were at the highest level since fiscal 2011, positioning us well to not only whether the cycles of our businesses, but also for possible future acquisitions, a key component of our long term strategy. At September 30 2018 our total order backlog was $51.1 million composed of semi and LED silicon carbide segments $23.7 million and solar segment $27.4 million. Compared to the total backlog of $41.2 million made up of semi and LED/silicon carbide segments of $22.3 million and solar $19 million at June 30 2018. Backlog includes differed revenue in customer orders that are expected to shift within the next 12 months. Gross margin in the fourth quarter of fiscal 2018 was 29%, compared to 35% in the preceding quarter and 36% in the fourth quarter of fiscal 2017. Sequentially and compared to the prior year gross margin decrease primarily due to lower volumes and factory utilization, and less recognition of previously deferred profit. For fiscal year 2018, gross margins were 31%, only slightly lower than the 32% in fiscal 2017 as both years benefited from the sales volumes resulting from Phase 1 and Phase 2 of our large turnkey project. Until we receive the next large expansion order, we will continue to experience lower volumes and a continuation of the pressure on gross margins our sold segment experience in the fourth quarter. Selling, general and administrative expense, SG&A in the fourth quarter of fiscal 2018 was $7.9 million, compared to $9.5 million in the preceding quarter and $9.8 million in the fourth quarter of fiscal 2017. Sequentially and compared to the prior year, SG&A decreased primarily due to lower commissions and freight resulting from lower shipments. Lower employee-related expenses in the fourth quarter of fiscal 2018 also contributed to the decrease in SG&A compared to prior year. Excluding variable commissions and shipping costs, we are beginning to see the results of the reductions in our structural costs in our solar segment and continued cost management in our other segments. As previously announced, due to the ongoing challenges we are experiencing in our solar segment, we implemented a restructuring plan during the fourth quarter of fiscal 2018. We recorded approximately a $900,000 of related costs in the fourth quarter of fiscal 2018. The plan is to not only align our workforce with current needs of our business, but also to enhance our competitive position for the long term success. We expect the plan to be fully implemented by April 1, 2019 and reduce our solar workforce by approximately 35 to 40 employees and operating costs by approximately $3 million on an annualized basis in that and subsequent quarters. We will continue to investigate opportunities to improve our operational efficiencies and effectiveness, including greater China sourcing in order to improve the competitive position of our solar segment while pursuing continued technological advancements. We also conducted our periodic assessment of long lived assets in the fourth quarter of fiscal 2018. The assessment resulted in a determination and a good will of $5.7 million and intangible assets of $1.3 million of the solar segment were impaired, due primarily to the decline in the expected performance of that segment. Research, development and engineering expense was $1.5 million in the fourth quarter of fiscal 2018, $2.1 million in the preceding quarter and $1.8 million in the fourth quarter of fiscal 2017. Income tax in the fourth quarter of fiscal 2018 was an expense of $400,000 compared to $1.4 million in the preceding quarter and $0.5 million in the fourth quarter of fiscal 2017. Net loss for the fourth quarter of fiscal 2018 was $9 million or $0.61 per diluted share, compared to a net income of $7.3 million, or $0.51 per diluted share for the fourth quarter of fiscal 2017 and net income of $5 million or $0.33 per diluted share in the preceding quarter. The net loss in the fourth quarter of fiscal 2018 was primarily due to the $7 million non-cash impairment in the solar segment. Net income for the fiscal year 2018 was $5.3 million or $12.3 million before the non-cash impairment charge in the fourth quarter, compared to $9.1 million in fiscal 2017. Now let’s take a look at our view for the coming periods. The company expects revenues for the quarter ending December 31, 2018 to be in the range of $27 million to $29 million. Gross margin for the quarter ending December 31, 2018 is expected to be in the mid to upper 20% range, with operating margin negative. The solar and semiconductor equipment industries can be cyclical and inherently impacted by changes in market demand. Additionally, operating results can be significantly impacted, positively or negatively by the timing of orders, system shipments, and 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 for the coming quarters will be significantly influenced by the timing of future orders of the 1GW turnkey project and the timing of meeting start-up milestones of the turnkey production lines. A substantial portion of the Amtech’s revenues are denominated in Euros. The revenue outlook provided in this press release is based on an assumed exchange rate between the United States Dollar and the Euro. A significant decrease in the value of the Euro in relation to the US dollar could cause actual revenues to be lower than anticipated. I now would turn the call over to the operator to start the question-and-answer portion of our call. Operator?

Thank you [Operator Instructions]. And our first question today will come from Philip Shen with ROTH Capital Partners. Please go ahead.

Hi everyone. Just talk through the Fokko departure. I was wondering if you could give us some more color as to why he left. Was he part of the restructuring effort? Was it expected or did he leave on his own accord? Some additional color would be helpful? Thanks.

I’ll take that one. So it was a mutual agreement with Fokko and the company. It was certainly on good terms. We certainly all agreed with the need to revamp our supply chain with lower cost components from China. However before making significant commitments to manufacturing in China, we will assess the potential profitability from doing that.

Okay, and there are some other key people who have left as well, is Jan-Marc still with the firm and I guess coming back to the question, was Fokko actually part of the restructuring? It sounds like he may have been, but I want to confirm.

Jan-Marc became [manager] [ph] over Tempress. So Jan-Marc is leading our solar divisions as we speak and as to Fokko, all of our good things come to an end and we will all face that someday including myself and this was a time for Fokko and we have mutually agreed to part way and we will continue to maintain our relationship and going forward that we did for 24 years. So there is no sort of problem related decisions. It was his time for him to make that decision.

Okay. As it relates to demand, I know you guys probably may feel this much later, but we’re starting to actually see some optimism come out of China ever so slightly with potential more than expected support for 2019 demand. I’m guessing you have not experienced any – I’m just wondering if you guys are hearing of any of this at all from any of your customers. I’m guessing it’s much too early as you’re probably more late cycle, but I wanted to see if you have any color on the 2019 outlook for the overall market in general as you know it pertains from your perspective?

Hi Phil, this is Mike. As of right now we have no additional color from our [Technical Difficulty] something. I don’t think they are ready to share that yet. They are also still adjusting to the latest news from the government, but when it does happen we will be ready to respond.

Okay, and then as it relates to, that makes sense, as it relates to tariffs, there is news out I believe yesterday with China announcing a list of equipment that could be excluded from tariffs. I think that included PECVD, ALD and diffusion furnaces those types of machines. So was this a headwind for you guys at all? I think the previous tariff was you know 8.8% starting from November 11. So I was wondering if this is incrementally positive news for you guys, I imagine it is, but what’s your view on that?

It can be an incrementally positive news for us. We’ve been working diligently with our customers, our import, exporters and our legal team to find ways to mitigate the impact of the tariffs and we did see some openings for high technology equipment to bypass some of those tariffs, but the proof is in the pudding. We haven’t yet seen the results of that. We put in the applications, but as of right now speaking of tariffs it is putting some damper right now in the marketplace, there’s still a lot of uncertainty. Hopefully Trump and President Xi can close the loop and come to an agreement at the G20, that’s what we’re hopping at very high level.

So we certainly have some potential of benefiting on our semi side if our equipment is excluded. Regarding PECVD and diffusion those are manufactured in Europe, shipped primarily into China and there we really didn’t see a tariff problem.

That makes sense.

So if we get customers, if we see expansions in the U.S. then certainly that will help.

Okay, great. And shifting to your backlog, you guys secured a couple of orders this quarter. Can you talk about the pipeline for additional insight solutions or equipment orders from customers; do you see some momentum of order flow in ‘19. It sounds like from your prepared remarks that may not be the case, but I wanted to check on this on the end type demand that you might be seeing.

I will take that first. Our potential pipeline looks very healthy lately, but how fast they can come down to a lower pipeline where we can [Technical Difficulty] the timing of those is still a bit too early to determine, but we do – we are encouraged by increased quotation activities.

Okay, good. Well we are sorry to see Fokko go, and I’ll pass it on from here. Thanks.

Yes, thank you. We’ll greatly miss him, yes.

And our next question comes from Jeff Osborne with Cowen and Company. Please go ahead.

Hey, good afternoon guys. A couple of questions on my end, maybe more modeling related, but is there any additional restructuring charges in the upcoming quarters. Was everything achieved in the most recent quarters?

So the charges for the current restructuring plan were taken all in the fourth quarter and so we don’t expect much of any restructuring charges in the first quarter. Of course there’s some severance connected with Mr. Pentinga’s departure and we will put that on the restructuring line. But no, we don’t expect any restructuring charges.

Got it. And the $3 million of OpEx savings, OpEx was down substantially about [Inaudible] this quarter. Is there a way to talk about how much was achieved from the current quarter or you know maybe just break out what the run rate of SG&A and R&D should be if we were just to say that the revenue run rate that you just guided forward to stay the same for a few quarters.

Yeah, so as you know we implemented the restructuring plan in the fourth quarter. We took the charge, but in Europe you need to give four months’ notice to those employees that are leaving and that’s the reason we are saying that we really won’t see the full effect until the March quarter and that’s when it will be fully implemented and then we’ll really see the full benefits starting in April 1, 2019. And so for Q1 I think you should model your expenses at comparable levels as what we saw in Q4, except – well yes, I’ll just leave it at that.

And then, can you clear, I guess the $3 million of savings, how much of that is in OpEx versus cost of goods. It was unclear to us.

Right. I would say that it’s probably about 50/50.

Got it. A few more if you don’t mind. It looks like in the quarter the gross margins in the LED and silicon carbide segment were down sequentially and lower than they’ve been in the recent past. Is that just a mix of consumables versus machines or what’s going on there?

Yes, it is mainly from the product mix Jeff.

Okay, but no permanent pricing pressure or anything in that market, just the mix issue one time.

No.

Got it. And then I think I know the answer to this, but the [11] [ph] million of N-type, is that just one customer [indiscernible] or any sense on what their longer term expansion plans are.

That was two separate customers.

Are these hybrid lines or are they production lines that could expand to greater…

Last quarter was with Trina. That was in our press release and that is for a production line.

Jeff, that was more specifically Trina advanced end type technology going into production for [inaudible] or the end type technology. And the other one is another, a very attractive N-type technology, but we need to leave it at that.

Okay, two other very quick ones here. One is just Robert the $27 million and change of backlog, can you just and maybe in the K, I haven’t gone through it if it’s out, but how much of that is attributable to the turn key customer, which it sounds like you have less near term in the month. I just wasn’t sure if there was any potential rebooks or differed revenue that maybe not roll through because of their actions?

Yeah, there is some differed revenue involved there and I think it’s about $2 million.

Okay, that’s 10% of so of the backlog, that’s fine. And then maybe for J.S. last question here. You mention the cash balance. A two part question; one is, what’s the philosophy of the board on the buyback. Obviously you announced it several quarters ago, you are active in the quarter and you asked another here. Do you intent – the stocks down 15% after hours here. Do you intent to be aggressive with that or you have spread that out over time; any thoughts there? And then also you alluded to an acquisition pipeline which you had mentioned in the past, over the past few years on and off. I just didn’t know if you could put the pipeline in context as to you know (a) what the opportunity set is, not looking for what your buying or who you’re buying, but just more importantly you’ve alluded to that in the past and do you intent to pull the trigger on something now that maybe valuations have reset?

Hi Jeff. Well, we always have a very careful proven approach to our spending investment, including buyback. We did successfully complete previous $4 million buyback. We felt that it was a good practice to put one more program in place and then we will determine if opportunity is compelled to take action and we will do that and it will give us a change to take actions. And so that was more a prevailing idea behind a new one. As to the acquisitions, and so we’ll also put Amtech’s history in the case, we do always have an organic expansion program on hand and we are busy with a few. I think that’s probably as far as we can stay at this point.

I appreciate it. Thank you.

Thank you, Jeff.

And our next question comes from Todd Felte with RHK Capital. Please go ahead.

Hey guys. In your earnings release today when compared to the June quarter you showed a substantial improvement in all segments in your book-to-bill ratio as well as substantial new order growth in all segments. And that being said, I was surprised your estimate for revenue next quarter was only $27 million to $29 million. Do you expect most of these orders to hit in your fiscal second, third and fourth quarters and can you add any color on this?

So, you know there is a great deal of variability on both the order intake and on the semi and very LED SiC area. Those orders turnover really rapidly and then on the solar side, those have longer lead times and so all of those factors, including final acceptances affect the timing of the revenue. So all of that has to be factored in to our guidance.

Thank you.

[Operator Instructions] Our next question comes from Mark Miller with Benchmark. Please go ahead.

I believe you indicated that Phase 2 of the turnkey project now looks like its second half of 2019 to begin the installation. Is that later than what you thought three quarters or three months ago?

Hi Mark, it’s J.S. Yes certainly, it’s later than what we expected all year this year. As I indicated the customer to quickly deploy attractive bi-facial N-type product locally, but that hasn’t happened. But it is a customer dependent timeline, obviously out of our control. Once the customer resolves the current module deployment issue, we will be ready and as you know the industry is a very dynamic industry. Even with all the macro conditions that we face things can happen sometimes quick. So that’s why we are always ready to respond in case our customer comes with all your decisions. But at this point, our visibility is just that about the second half of 2019 for Phase 2 installations and as to Phase 3 new order, our visibility is still limited.

You mentioned the semi/silicon carbide/LED business that’s been doing fairly well. What you are expecting those results to maybe have peaked last quarter. Is that because of the expected decline in semi is going to be offsetting the growth because 5G is just starting to ramp especially for silicon carbide. So what’s going on with semi is the CapEx reductions are starting, will be greater than the expected growth next quarter or in the next couple of quarters for silicon carbide?

Hi Mark, this is Mike. Yes, there is that factor, and also the overhang from the existing tariffs between China and the U.S. It tapers a lot of [Technical Difficulty] for our semi customers in China.

Thank you.

And this will conclude our question-and-answer session. I would like to turn the conference back over to Robert Hass for any closing remarks.

Thank you everybody for participating in today’s call. This will conclude our call today. Thank you all.