Amtech Systems, Inc. (ASYS) Q1 2019 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 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, operator. Good afternoon, and thank you for joining us for Amtech Systems First Quarter Fiscal 2019 Results Conference Call. On the call today are J.S. Whang, Amtech Systems Executive Chairman and CEO; and Michael Whang, our Vice President of Global Operations and Chief Risk and Information Officer; Lisa Gibbs, Amtech’s Vice President and Chief Accounting Officer; and myself Robert Hass, Amtech’s Vice President and Chief Financial Officer. After the close of trading today, Amtech released its financial results for the first quarter ending December 31, 2018. That earnings release will be posted on the company’s website at amtechsystems.com. During today’s call management will make forward-looking statements. All such forward-looking statements are based on information available to us as of this date and we assume no obligation to update any such forward-looking statements. These statements are not a guarantee of future performance and actual results could differ materially from current expectations. Among the important factors, which could cause actual results to differ materially from those in the forward-looking statements are changes in the technologies used by our customers and competitors; change in volatility and the demand for our products; the effect of changing worldwide political and economic conditions, including government-funded solar initiatives and trade sanctions; the effect of overall market conditions, including the equity and credit markets; and market acceptance risks. Other risk factors are detailed in our Securities and Exchange Commission filings, including our Form 10-K and Forms 10-Q. I will now turn the call over to J.S. Whang, our Executive Chairman and Chief Executive Officer, to begin the discussion. J.S.?

Thank you, Robert. Thank you for joining our call today. As we begin today’s discussion, I like to follow up on the reference to our business I made during our fiscal 2018 year-end call in November. At that time, I mentioned that we were about to undergo a review of our business. This comprehensive review is now well on the way as we take a detailed look at the markets, we serve our position within them, and our forward opportunities. The purpose of this review is two-fold. One is to determine how to address our current solar challenges. The other is to explore and determine how best to position our company to deliver profitable growth over the long-terms. One result of our review thus far strongly indicates that our combined semi and SiC/LED business that produced greater than $90 million in revenue and $15 million in operating profit in fiscal 2018 provide the best markets for announcing the value of Amtech Group in the near and longer-terms. Therefore, we will increase our effort and resources to expand our semi and SiC/LED segment. We look forward to further updating you on our conclusions as we – as our assessment progresses. Now, Michael will discuss our Q1 fiscal 2019 business segment performance. Michael?

Thank you, J. S. Our semi and SiC/LED businesses are doing well. The team delivered first quarter operating income of $3.5 million as end user market support continuous demand for our products. Our core chip packaging and SMT business generates very attractive cash flow. Our chip fabrication business continues to seek growth opportunities in the power chip market that can deliver good value enhancing profits and our merging growth chip substrate business is likely to see improved profitable growth as the industry looks to silicon carbide and gallium nitride devices to meet high performance specifications. We’ve fully recognized that portions of our business will perform in line with the overall semiconductor industry. However, we believe that these growth pieces of our semi-business such as the SiC and power devices have the potential to significantly outperform the broader semi-market and we are confident that the related opportunities ahead of us present a very exciting future. We look to capture this growth through ongoing innovation implementation and pursue a very select external opportunities that can extend our product offerings, deliver strong cash flow, and profitable growth. However, our first quarter solar business segment business segment bookings and financial results reflect the difficulties we are seeing in the marketplace. As we have mentioned in prior calls, we are operating in a highly competitive environment as local Chinese competition dominate the largest market for solar cell production equipment. Adding to that challenge, in May of last year, the Chinese government announced their new policy outlining the government’s changing investment strategy with respect to solar. Given that we expect this challenge to continue for the foreseeable future as part of our business review, we are seeking feedback from our solar customers regarding their short and longer-term plans to best determine if and how our more advanced technology solutions fit in. We look forward to updating you once we have completed our review. One other important update regarding our solar business, following months of expectations about the next phase of investment by our turnkey customer, in December of 2018, we were notified by this customer that the turnkey contract for Phase II had been terminated due to no fault on our part. As a result, we will not perform the final installation and integration of our equipment. Final settlement of the contract is under review. We have nothing further to add to explain this change from our prior expectations, but we assume the change macro factors contributed to this decision. And now, I will turn the call over to Robert to review the first quarter financial results. Robert?

Thank you, Michael. Let’s now review our first quarter fiscal year 2019 financial results. Net revenue for the first quarter of Fiscal 2019 was $29.5 million, compared to $28.8 million in the preceding quarter and $73.6 million in the first quarter of fiscal 2018. Sequentially revenue for semi and SiC/LED was down slightly, which was more than offset by higher solar revenue as we began shipments for the previously announced TopGun order. Compared to the prior year, net revenue decreased primarily due to no shipments of the solar equipment for the turnkey project in the first quarter of this fiscal year. Our semiconductor shipments are affected by the cyclical nature of the semiconductor industry and also experience quarter-to-quarter variability based on the timing of orders and delivery schedules established by one of our customers. Unrestricted cash and cash equivalence at December 31, 2018 were $56 million, compared to $58.3 million at September 30, 2018. At December 31, 2018, our backlog was $41.3 million with $21.6 million coming from semi and SiC/LED segments and 19.7 million coming from the solar segment. That compares to total backlog of $51.1 million, including semi and SiC/LED segments backlog of $23.7 million, and solar segment backlog of $27.4 million. At September 30, 2018, due to the termination of the Phase II turnkey order that Mike discussed, we have removed from backlog the deferred revenue related to this order and do not expect any future orders relating to this project. Backlog includes deferred revenue and customer orders that are expecting to ship within the next 12 months. Gross margin in the first quarter of fiscal 2019 was 31%, compared to 29% in the preceding quarter, and 28% in the first quarter of fiscal 2018. Sequentially and compared to prior year, gross margin increased primarily due to a greater proportion of semi and SiC/LED shipments that have higher margins and increased recognition of previously deferred profit by the solar segment. Selling, general and administrative expense otherwise known as SG&A in the first quarter of fiscal 2019 was $8.2 million, compared to $7.9 million in the preceding quarter and $10.6 million in the first quarter of fiscal 2018. Sequentially SG&A increased primarily due to legal expenses related to our restructuring efforts in our solar segment, compared to prior year SG&A decreased primarily because in the prior year our solar segment incurred higher commissions, freight on the turnkey shipments, personnel and other expenses, and administrative expenses related to the shipment of equipment for Phase II, and commencement of installation of Phase I of the turnkey project. Restructuring expense was $0.9 million in the first quarter of fiscal 2019 and the fourth quarter of fiscal 2018. We did not have any restructuring expense in the first quarter of last fiscal year. Research, development, and engineering expense was $1.9 million in the first quarter of fiscal 2019, compared to $1.5 million in the preceding quarter and $2 million in the first quarter of fiscal 2018. Income tax expense in the first quarter of fiscal 2019 was $0.6 million, compared to $0.4 million in the preceding quarter and $1.2 million in the first quarter of fiscal 2018. Net loss for the first quarter of fiscal 2019 was $2.4 million or $0.17 per share, compared to net income of $6.5 million or $0.42 per diluted share for the first quarter of fiscal 2018, and a loss of $9 million or $0.61 per share in the preceding quarter. Because in the first quarter of this fiscal year, we continued to incur cost, [but no] revenue related to the turnkey project. The net loss in the fourth quarter of fiscal 2018 was primarily due to the $7 million noncash impairment charge in the solar segment. Now let’s turn to our outlook. The company expects revenue for the quarter ending March 31, 2019 to be in the range of $27 million to $29 million. Gross margin for the quarter ending March 31, 2019 is expected to be in the mid-to-upper 20% range with operating margin negative, due to the continuing headwinds faced by our solar segment. The solar semiconductor equipment industries can be cyclical and inherently impacted by changes in markets demand. Additionally, operating results can be significantly impacted positively or negatively by the timing of orders, system shipments, recognition of revenue based on customer acceptances. The net impact of revenue deferral on shipments and the financial results of solar cell and semiconductor manufacturers. A substantial portion of Amtech’s revenues are denominated in euros and RMB’s. The revenue outlook provided here is based on an assumed exchange rate between the U.S. dollar and the euro and the RMBs. A significant decrease in the value of the euro and RMB in relationship to the U.S. dollar could cause solar revenues and semi cost to be lower than anticipated. I now will turn the call over to the operator for the Q&A section.

[Operator Instructions] The first question comes from Christopher [indiscernible] with Cowen. Please go ahead.

Hi, thanks for taking my question. First question on the 13% semi-conductor customer, understand if you can’t name the customer, but would you be able to provide an idea of the end market and if that’s a silicon carbide product? And then kind of from a bigger picture standpoint, regarding silicon carbide equipment sales for the year, can you give us an idea of what that’s looking life for fiscal year 2019, and how much of the backlog is related to that?

We can't obviously mention the name. Our forward-looking forecast is positive, but there will be headwinds in 2019 in our semiconductor. We anticipate a slowdown due to macro factors and challenges from the existing U.S. China trade wars. However, we are seeing continued growth from our silicon carbide LED polishing segment that tempers some of those headwinds in the broader semi market.

We can also tell you that that customer is in our chip fabrication, which is part of our semiconductor, part of our business.

Okay, that’s helpful. And then looking at like operating expenses over the next few quarters, can you provide some kind of cadence and where the trend is going to be going from that standpoint?

We don't see a lot of change. So, I’d consider that relatively flat.

Okay and then as far as kind of potential M&A to further diversify, are there specific areas you guys are looking at right now that your thinking might be interesting to complement the portfolio?

Yes. Ongoing basis, we continue to put our effort into that. We don't have a specific name that we want to share at this point. We are more interested in newly emerging opportunities in SiC silicon power chip value chain will be our interesting part.

Appreciate that. I’ll hop in the queue. Thanks.

Thank you.

The next question comes from Craig Irwin with ROTH Capital Partners. Please go ahead.

Good evening, and thanks for taking my questions. So, your gross margin performance was quite a bit stronger than guidance and it clearly came from the semi and silicon carbide LED side of the house, can you maybe talk about what’s working there. What’s going a little bit better than you would have expected coming into this quarter. Is there anything that you would call out as one-time? And would you expect this strength to continue over the course of fiscal 2019?

So, those two segments have always had higher margins and what happened this quarter was, they were a greater proportion. Those revenues were a greater proportion of our overall business, as this quarter we did not have any turnkey revenue, from our solar segment.

Understood. So, my second question is about the $3.5 million in operating income that you broke out for us, the semi’s and silicon carbide LED businesses, obviously nicely profitable, if you look at that that suggest roughly $1 a per share in cash earnings power just on those businesses, if we can get the solar business down to net zero contribution from the drive that it is now. Can you maybe update us where we are on the plan to reduce the losses on the solar side? You know, I know you have the restructuring that you took charges for both last quarter and this quarter. You’ve said recently that you expect them to be fully effective or fully implemented by April 1, but can you maybe quantify for us the approximate savings and is there anything else that needs to be done with this business to get it back to sort of a net neutral contribution?

Yes, as we indicated earlier, we are going through rather comprehensive review also our solar business and we also informed that our turnkey business was terminated at the end of last December. So, we will give very close look at the cost associated with the turnkey Phase 2 installation and processor start that now we don't need to perform. So that will clearly will require for the restructuring, decide the restructuring plan that we’re currently implementing.

Thank you for that. My last question if I may, is about the character, the growth character of your semi and silicon carbide/LED Polishing businesses. So, if we look backwards over the last couple of years these have grown typically in the range of 20% to 30%. Sometimes even faster. And when we look at the tempo of capacity expansion announcements out of the silicon carbide industry today in particular it seems that there is an acceleration in the growth rate, would you expect to be sort of on the upper bound of your historic growth rate in these businesses over the course of the next several quarter?

Hi, Craig, this is Mike. While that’s our best hope. Given the macro challenges that all of our semi and SiC/LED business units are facing right now. At least for the remainder of the calendar year, we will probably be a little bit softer than that. But over the longer-term, we have all indications that we're going to see very close if not even more growth than we’ve seen historically.

That’s really encouraging, congratulations on the strong performance this quarter. I’ll hop back in the queue.

Thank you.

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

Just wanted to talk about the impact, the termination of the turnkey order, is there anything in inventory or any equipment you were scheduled to deliver for that or any inventory you bought? Are we going to see any write-offs because of that because you had preplanned some work for that?

So, we investigate our inventory, analyzed our inventory every quarter, and we’ve consistently used the same methodology taking into account both past unit shipments and expected unit shipments and take results when appropriate, and we did the same this quarter.

You mentioned 5G is an opportunity, is that coming through silicon carbide, wonder if you can give us a little more color about the opportunity specifically in 5G?

If we look at the upcoming change whether from increased consumer devices, IoT, autonomous driving, AI bigdata there is an evolution going from a 4G to 5G and that’s where not only just our silicon carbide unit, but also our broader semi unit that participates in the growing power chip and RF sector will participate going forward.

You mentioned flat OpEx, but yet you had some legal expenses at SG&A for the prior quarter, shouldn’t the SG&A be somewhat lower because you are not going to see those legal expenses this quarter?

Well as we stated now without having to perform the installation and integration of the turnkey project, we will be going into reviewing another phase of reorganization. And depending on the size of that, that could initially involve some severance, but after that, so eventually yes, we would expect SG&A to go down, but in the near-term quarters we would expect it to be flat.

Thank you.

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

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.