Good day, and welcome to the Amtech Systems Second Quarter 2021 Earnings Conference Call. Please note that this event is being recorded. I would now like to turn the call over to Erica Mannion of Sapphire Investor Relations. Please go ahead.

Good afternoon, and thank you for joining us for Amtech Systems fiscal second quarter 2021 conference call. With me on the call today are Michael Whang, Chief Executive Officer; and Lisa Gibbs, Chief Financial Officer. Also joining us is Paul Lancaster, Amtech's Vice President of Sales and Customer Service. After close of market today, Amtech released its financial results for the fiscal second quarter 2001 -- 2021, excuse me. The earnings release is posted on the company's website at www.amtechsystems.com in the Investors section. During today's call, management will make forward-looking statements. All such forward-looking statements are based on information available as of this date, and the company assumes no obligation to update any such forward-looking statements. These statements are not a guarantee of future performance and actual results may 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 customers and competitors, change in volatility and the demand for products, the effect of changing worldwide political and economic conditions, including trade sanctions; the effect of overall market conditions, including the equity and credit markets and market acceptance risks, capital allocation plans and the worldwide COVID-19 pandemic. Other risk factors are detailed in the company's SEC filings, including its Form 10-K and forms 10-Q. I will now turn the call over to Michael Whang, Chief Executive Officer.

Thank you, Erica. Amtech continued to deliver strong momentum in the second quarter with revenues of $19.8 million, coming in at the high end of our expectations. Activity within the semi market continues at a strong pace with record bookings and with continued upside opportunities across our served markets. For our advanced packaging products, market forecasts continue to point to a strong outlook in 2021, and we are seeing this translate to continued order activity. At this point, we are approaching near 100% capacity utilization at our Shanghai facility, given the increased business demand and have taken steps to both increase interim capacity as well as move to a larger facility later this summer. Within the power semi market, our customers have moved forward with their capacity expansion plans that were previously placed on hold due to the pandemic. In the second quarter, we received orders for 6, 300-millimeter diffusion furnaces from 1 customer that pulled in their capacity expansion project due in part to a strong global demand of power chips, particularly for automotive applications. These tools are scheduled to ship the second half of calendar 2021. In addition, the dialogue with our other customers remain very robust as they evaluate their multiyear expansion plans. Overall, we continue to be pleased with the performance of our semi segment, following a year of strong growth in advanced packaging applications in 2020, we are seeing demand continue into 2021 as industry shortages continue to accelerate capital expansion plans. Illustrating the strength in the second quarter, our book-to-bill ratio for the semi segment grew to over 1.7:1. Since growth rates for our products tend to correlate with the overall semi CapEx spending, we believe the strength in demand we are experiencing will continue in line with the broader industry. Moving on to…

Thank you, Michael. Net revenues increased 10% sequentially and increased 37% from the second quarter of fiscal 2020, with the sequential increase primarily attributed to strong shipments of SMT equipment. The same prior year period was affected by the COVID-19 pandemic. Gross margin decreased in the second quarter of fiscal 2021 on a sequential basis, primarily due to product mix, with increased multi-unit sales at lower margins and increased mix of lower-margin SMT sales. Gross margin increased in the second quarter of fiscal 2021 compared to the same prior year period due to increased capacity utilization. Selling, general and administrative, or SG&A expenses increased $0.5 million sequentially and $0.3 million compared to the same prior year period due primarily to increased freight, M&A, consulting and legal fees. Research and development increased $0.6 million sequentially and $1 million compared to the same prior year period as some of our engineers completed specific customer design work and shifted to strategic R&D projects. Operating income in the second quarter of fiscal 2021 was $0.2 million compared to operating income of $1.1 million in the first quarter of fiscal 2021, and operating loss of $1 million in the same prior year period. Income tax provision was $0.5 million for the 3 months ended March 31, 2021, compared to a provision of $0.1 million in the preceding quarter, which included a tax benefit of $0.3 million related to the reversal of previously recorded uncertain tax positions and $0.2 million in the same prior year period. Our effective tax rate continues to be higher than the statutory rate due to higher income in foreign jurisdictions. Loss from continuing operations net of tax for the second quarter of fiscal 2021 was $0.2 million or $0.02 per share. This compares to loss from continuing operations of $0.5 million…

[Operator Instructions] Our first question will come from Craig Irwin with Roth Capital Partners.

Lisa, I really appreciate you breaking out the expense from the cyber security incident. Can you maybe provide us a little bit more color on the M&A fee in the quarter, your other impacts on SG&A. Traditionally, you've done a very, very good job keeping the spending there tight. We'd like to get to sort of an operating number.

Understand, Craig. I would say that we had probably a couple of hundred thousand on M&A, adding maybe $100,000 in consulting and then a couple of hundred thousand in freight and logistics that we expect to be kind of ongoing.

So, all-in, it looks like you're probably tracking very well, I would say. That's pretty clear.

Generally, yes, we're keeping our focus on it. And I also would remind everyone that part of that SG&A is variable with our commissions on higher sales as well.

So then the contribution from your acquisition over the next couple of quarters, usually, there's some expense for integration. Can you maybe sort of talk about the component of your revenue guidance from this new property? And then are there some restructuring or integration expenses that you're going to incur over the next few quarters? And do you expect it to be accretive in '22? Any color there is helpful.

Sure. As Mike indicated, right now, we expect a revenue, a top line contribution in the range of $400,000 to $500,000 per quarter, very good gross margins consistent with consumables. Modest operating margin at this point. Not any significant integration or restructuring costs, but we will be looking to realize those synergies we talked about and see some growth there at the top line and better contribution to operating margin starting in our fiscal 2022.

So moving over to PR Hoffman. You guys have done a lot of work there to prepare for the growth that's coming in the silicon carbide wafer industry. Can you maybe talk a little bit about whether or not you're shipping any cassettes, and I don't know if I'm using the correct diction there? But any templates or cassettes for 8-inch wafers yet? Have you been sampling these products? There's quite a lot of enthusiasm out there for what commercial adoption of 8-inch can do for the finished cost of not just the wafers, but the end devices and the rate of adoption in the end market.

Hi, Craig, this is Mike. What I can say is that we have been sampling 8-inch consumables with our customers currently.

So then to move to commercial production, you're tooled up and it would really just be a demand pull from your customers at this point?

Yes.

The next question is your OSAT business has been doing great over the last couple of quarters. It seems like that momentum is continuing. Is there an opportunity for you to increase capacity in your Chinese facility? Is that something you would consider? Or if demand exceeds what you can produce in that facility, would you be more likely to maybe use outsource suppliers or assemblers to help you deliver the volumes that the market demands.

Sure. We're moving to a new facility later this summer. That's in progress right now. We're very excited. It will have increased capacity for us. But we're already doing creative things right now to increase our capacity at our existing location, some of it may be outsourcing or adding a little bit of space in the next door location, a lot of different creative thoughts going into how we can meet our customer demand at this time. But certainly, by the end of this summer, we will have that increased additional capacity, and it would be a great problem to have if we start to even outgrow that.

And then last question, if I may. R&D was quite a bit higher this quarter than it has been actually for the last couple of years, about $1.9 million. Can you maybe break out for us what's driving the higher expense? I mean, is there a slate of new products that you're looking to bring to market? Or are there specific initiatives that you can call out that point to future products that would broaden the revenue funnel?

Sure. You're absolutely right. And I think you will know that these businesses traditionally did not get a lot of R&D investment in previous solar [ph] years. So some of it is catching up there. But I hope that in the next couple of quarters, we can talk more to you about the things that we're working on. It's very exciting. Some of it is new products to serve markets that we're excited about. Some of it is next-generation platforms or upgrades to certain things, certain areas of our existing equipment. So we don't expect this to be sustained for the longer term, but definitely necessary important investments for our longer-term revenue growth. And we hope to able to talk to you about them in the next few quarters.

But a similar run rate for the next couple of quarters. Is that fair?

It was higher this quarter. I hope it will dip a little bit in the next couple of quarters, but not significantly. It will stay at this range for the next few quarters.

Congratulations on the strong revenue growth.

And our next question comes from Jeff Osborne with Cowen & Company.

A couple of questions on my end. The housekeeping, the $1 millionish insurance charge, where would that show up in the P&L?

It will show up in SG&A.

And then the 6 units in backlog, the 300-millimeter units for the second half. Given it's a multiunit order, do you -- and you flagged multiunit orders this quarter dragging down gross margin sequentially. I'm just trying to think about the September and December quarter as those shift, would it be a little bit touch below 40%, maybe in the high 30s? Or how do we think about that?

I think that's a fair statement, yes.

And remind me, it's been some time since you shipped those in volume just given COVID, those ballpark or what, about $1.5 million, $2 million a piece? Is that a reasonable assumption?

That's slightly less.

A little bit lower than that range.

And then can you, Michael, give us a sense of the urgency with your customers, just given everything that's going on with -- on the demand for the auto side, people expanding -- I'm trying to get a sense of what level of energy your sales team has in terms of engagement, certainly seeing it in the book-to-bill, but I'm just trying to get a sense of how much momentum there is over the coming quarters.

What I can say is that my sales team is very active, more so than they have been in the past few quarters. And there is a sense of urgency among our top-tier customers to quickly expand their capacity. So things are clicking right now in terms of opportunities, all these engagements are in the past, are turning into orders. So there's a lot of strong momentum going forward right now.

And then I just had a few follow-ups on IDI. First of all, where are they located? Can you give us a sense of how many folks are on board there?

They're located in Connecticut. It's a small operation, less than 10 employees.

And then is there any current overlap with your existing customer base? Or is this all new incremental customers that you're capturing?

There is a good amount of overlap with our existing customer base in the new Material and Substrate segment, and we're excited about that. One of the goals is to align our product road map and capture the natural synergies that we have with this acquisition. So definitely excited about the future potential. The team that we brought on, although it's a small tuck-in acquisition, they are well-known in the wet chemical industry.

And then my last question, Michael, is just the gross margin profile of what was formerly known as the silicon carbide LED segment. The past 3 quarters has been somewhat more depressed relative to historics. How much of that is attributable to the expansion at PR Hoffman and sort of the underutilization of that new facility or the lower revenue? Or is there pricing? I'm just trying to get a sense of what are the variables driving the losses in that segment currently?

Jeff, it really is kind of the first 2 primarily that you mentioned. So we added capacity, so increased annual rent expense. We added some new equipment, so increased depreciation. And even the polishing machine sales through 2020 have been very, very low. So it's a combination of both of those. I think with the increased equipment orders that Mike referenced, we're seeing increased order activity even in April here. I expect to see that improve. It's going to be a stepped improvement each quarter. So I think it's going to be a few quarters out before we see them return to normalized ranges, but we expect improvement over the next few quarters with better revenues.

And our next question comes from Mark Miller with The Benchmark Company.

Congratulations on your orders and the improvement in the backlog. Just wanted to talk on that. You said the diffusion furnaces would be roughly high 30 margins. What about the remainder of your backlog as a whole in terms of the margin profile? Or will it be similar to recent margins or below or above what you've been posting for margins in terms of what's in the backlog currently?

I think that the backlog will be probably similar to slightly lower than what our margins have been. We have seen an uptick in these multiunit orders. And that does drive a little bit of a lower margin profile.

You mentioned IDI will have good margins. Will those margins be above the corporate average?

Yes, they should be. Absolutely. The consumables have a great margin profile. And as they grow, that will be a really nice addition for us.

Do you expect that to be immediately accretive?

Well, yes, we said $400,000 to $500,000 of revenue per quarter, strong consumable type gross margins with modest contribution to operating margin at this point.

Any help on the taxes going forward this year would be appreciated for modeling?

Well, we continue to have a high tax provision each quarter as we have a lot of our income generated from foreign jurisdictions, where we don't have our net operating losses to utilize. So I think the range of this quarter certainly was high. I would like to bring that down a little bit, but it will continue to run at this -- somewhat at this clip for a while until some of our U.S. income returns, we do have some NOLs to use there.

Is that similar in terms of dollar amount or similar in terms of percent of revenues?

I think it's probably similar in terms -- a little bit lower, ideally, a little bit lower in terms of dollar amount, I would say.

And that does conclude the question-and-answer session and today's conference call. We do thank you for your participation. Have an excellent day.