Asyst Technologies, Inc. F2Q09 Earnings Call Transcript

Asyst Technologies, Inc. (ASYT)

F2Q09 Earnings Call

October 29, 2008 5:00 pm ET

Executives

John Swenson - VP of IR and Corporate Treasurer

Steve Schwartz - Chairman, President and CEO

Aaron Tachibana - SVP and Chief Financial Officer

Analysts

Hari Chandra - Deutsche Bank

Brian Lee - Citigroup

Jinhy Yoon - JPMorgan

Mike Nery - Nery Asset Management

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Asyst Technologies second quarter 2009 fiscal year conference call. At this time all parties will be in a listen-only mode and then we will conduct a question and answer session and our sections will be given out at that time. (Operator instructions) This conference is being recorded today, October 29, 2008.

I would now like to turn the conference over to John Swenson of Asyst Technologies. Please go ahead, sir.

John Swenson

Thanks you. Good afternoon everyone and welcome to this fiscal 2009 second quarter conference call for Asyst Technologies. As noted in our press release earlier today, we are reporting preliminary results for fiscal second quarter in the September 30, 2008 pending completion of Interim Goodwill Impairment Analysis.

We report final results for the quarter upon completion of the analysis and in conjunction with filing of our financial statements in Form 10-Q and Aaron Tachibana will have more detail on that analysis in his comments.

The release will be posted to our website at www.asyst.com. To access the release, interested parties should click on the ‘Investor Relations’ link followed by the ‘Press Release’ link.

I need to remind that during today's call we will make forward-looking statements. We have no obligation to update these statements. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. These risk factors are described in our most recently filed reports with the SEC as well as today's press release.

We also will present non-GAAP financial information in this call. For a reconciliation of our non-GAAP financial information to the equivalent measures under GAAP please refer to the press release, which again is posted on our website.

Now to our conference call. Aaron Tachibana, our CFO, will review financial highlights for the quarter as well as outlook. Steve Schwartz, our CEO, will provide a strategic overview and will comment on current product and market trends. After the formal comments we all will be happy to take your questions.

Now, I will turn the call over to Aaron Tachibana. Aaron?

Aaron Tachibana

Thank you, John, and good afternoon everyone. This is my first earnings call as CFO for Asyst. I have been with the company in various financial leadership roles for more than four years, most recently, as Vice-President of Finance and Chief Accounting Officer. I know the company well, and I believe I understand our challenges and our opportunities.

In one third of our business, what we call a tool business, we are fully outsourced to Flextronic, and quarter after quarter, we deliver a strong gross margins and excellent customer satisfaction.

This is the model that allows us to variabilize our cost structure and to provide the president in platform for further outsourcing in the rest of our business.

In AMHS, we are in the process of outsourcing most of our remaining manufacturing to Flextronics and are transitioning the supply chain to lower cost regions and suppliers. This is being led by strong people and we are working with the familiar and effective partner, Flextronic. We are also driving to install these systems more efficiently and to track and build customer’s change orders more effectively.

Our progress has been too slow and our current volumes were sent to the deposit net. However, we expect to deliver stronger in AMHS gross margin in the current quarter and are confident in our ability to show further improvement moving forward.

In addition to the current and expected gross margin improvement, we already have reduced on going annualized operating expenses by $10 million and currently are taking actions to deliver an additional $20 million of annual saving. Combination of these improvements is driving our GAAP break even to the $85 million to $90 million range and our cash break even to the $75 million to $80 million range as of the March quarter. This positions the Company to the current downturn and improved profitability when the cycle turns. At the same time, we are prepared to reduce additional cost quickly if we see further erosion in market demand.

I am proud of the recent and rapid improvements we have made and I am excited about the long term opportunity of Asyst. I say this with my eyes wide open to the challenges that remain and I am committed to tap on these challenges and helping to unlock value for shareholders.

Now, to the results for the quarter. New orders totaled $107 million up from $63 million in Q1. In AMHS, we have good breadth with the cross of numbers of customers and bookings of $84 million. We received one order in excess of $30 million related to the last phase of a large flash fab in Japan. Four other customers each accounted for bookings in the $10 million range, including customers from flat panel, larger, well wafer, and memory.

Bookings of tool in fab automation products totaled $23 million down from $29 million in Q1. This is consistent with the continuing declines in bookings and shipment level among the OEMs.

The mix of new orders was as follows. Semiconductor 80%, flat panel 12%, and service was 8%. OEMs represented 10% of new orders and the remainder, or 90%, came from end users.

By geography, new order distribution was follows. North America 21%, Japan 59% Taiwan 8%, other Asia Pacific, including Korea, was 10%, and Europe was 2%. Backlog as of the end of the quarter was $91 million up from $80million at the end of Q1.

Consolidated net sales for the fiscal second quarter were $95.1 million, down from the $100.3 million in the prior sequential quarter. This was in line with our guidance. Net sales of AMHS were $71.1 million, up from $67.6 million in the prior sequential quarter. Of this, semiconductor comprised approximately $51 million compared with $50 million in Q1. But, panel display comprised approximately $18 million up from $17 million in Q1. Net sales of tool and fab automation solutions were $25 million, down from $32.7 million in Q1.

Sales mix was as follows. Semiconductor 70%, flat panel was 19%, and service was 11%. OEM represented 13% of sales for the quarter.

As part of transitioning the manufacturing of our AMHS vehicles to Flextronics, we have substantially renegotiated our existing supply terms of Flex. As a result, we recognized a $1.9 million charge in our tools business. There will be additional cost incurred to support this transition which Flex is showing that we are running to cost of sale. Including these costs, consolidated gross margin for the quarter was 27%, up from 25% in the quarter, in the prior quarter. Including these charges gross margin was flat with the prior quarter. For these one time charges, gross margin on tool and fab automation solutions was 42% which is in our target operating range. Including the impact of the charges, tool and fab gross margin was 35%. The AMHS gross margin was 21%, up from 16% in Q1.

The improvement was driven by better pricing on one of our largest projects. This time in current backlogs, we expect to achieve further gains to the mid 20s of the percentage in the current quarter, and currently anticipate that the AMHS gross margin in March quarter will be close to 30%.

We believe that AMHS has positioned for further gains and of 31 to 33 percent range in succeeding quarters. All of these targeted improvements include the impact of the outsourcing transition cost. Some steep costs are behind us and we begin to realize the benefit from the outsourcing roughly one year from now. We expect to deliver AMHS gross margin in excess of 32%.

Now, let's move on to operating expenses. Consolidated R&D expense was $9.9 million, up from $10.9 million in the prior sequential quarter. We are trimming on the spending further in the current quarter.

SG&A expense was $19.4 million, roughly down $1 million from the Q1 level and down $8 million from two quarters ago. We expect to take out an additional $2 to $3 million from SG&A in the current quarter, and have further savings identified for fiscal Q4.

Net interest expense was $1.9 million for the quarter. Other expense, primarily foreign exchange losses was $1.4 million.

On a non-GAAP basis, we reported a net loss of $7.8 million, or $0.15 per share which is roughly flat with the last quarter.

As mentioned in our press release, we are conducting evaluation analysis of goodwill on the balance sheet.

Historically, we have made the annual assessment in the December quarter. However, due to unprecedented decline in the market value of the company’s stock over the past several weeks. Management determined that in interim assessment was necessary as of Q2.

We believe this analysis will lead to non cash goodwill impairment charge in the range of $85 to $90 million which would be reflected in net income and the balance sheet upon filing our 10-Q.

This charge will put us out of compliance with our debt to total covenant we have initiated discussions with our vendors around an amendment or waiver and expect to address the non - compliance before planning of 10-Q.

Now, let's turn to the balance sheet. We ended the quarter with $79 million of cash, up from $67 million at the end of June. That was down approximately $4 million.

Including changes in working capital, cash burn in the last was approximately $5 million. In Q3, we expect to be cash neutral excluding working capital and cash restructuring cost.

We believe that the current level of cash is sufficient to support our operating needs and debt service for the next year.

Now to our outlook for the fiscal third quarter ending December. We expect sales to be in $70 to $80 million with AMHS in the range of $50 to $60 million, and tool and fab automation at $25 to $20 million. We expect to report a non-GAAP loss of $0.15 to $0.19 per share, and a GAAP net loss of $0.25 to $0.30 per share. GAAP net loss is expected to include $3 million to $5 million in restructuring charges related to our cost reduction initiatives.

With that I'll turn it over to Steve.

Steve Schwartz

Thank you, Aaron. Aaron did a good job of laying out for you in what we have done so far and what is going to occur over the next few weeks to stabilize the Company’s profitability and cash flow. The results will be visible in our reported results for the current quarter and even more profound in the March quarter when we expect to combine even lower operating cost with higher sales, and the gross margin back above 30%.

At sales of the least $85 million which we believe is achievable based on bookings, we expect to be up or near break even on a non-GAAP basis for the March quarters.

Our visibility beyond March is limited. We expect the business to ride out an extended down turn with sales in the range of $70 million to $80 million per quarter. If business trends below that level, we will move quickly determine additional costs.

Looking at stock price, but now can be expressed solely to the right of the decimal point. We want to make one thing perfectly clear. Asyst plays a critical role on our customer satisfactory and we intend to be wherever they need us for a long, long time. We will maintain the service and engineering infrastructure necessary to continue to meet their requirements. We will not compromise on responsiveness, quality, or safety. And will continue to invest in the next generation technologies they will need to remain competitive. In that regard, we are continuing to maintain a high level of R&D spending relative to our own history and as the percentageof sales.

Our product road map and release schedules remain on track. However, where we can we were reducing material spending inline with lower customer demand for engineering changes and demo systems. And it looks like customers may be ready to spend again; we were prepared to turn this investment back on.

Recognized, there are also concerns around Company’s debt burden which is substantial. Servicing the debt between the estimated interest charges and minimum schedule principal payments will require $35 million over the next year. Our reduction in cost of goods and assets to fund the debt service and will allow us to reduce total leverage for the company by at least $27 million while keeping projective cash balances of at least $60 million over that period.

The banks so far, have understood the cyclical dynamics of this industry and had been willing to accommodate amendments to our covenant structure.

Remaining additional supports from our bank and we have believed that our ability to generate cash flow to service the debt, will be important reinforcement for any additional accommodations we received.

In times like this, we appropriately are focusing our discussion on cost reduction and balance sheet management, but assuming that the world is likely to need more chips 18 months from now than it does today there eventually will be an upturn. When business finally does turn up, we have positioned ourselves to deliver significant profitability. At $100 million of quarterly sales which is below our average run rate of the last three years, we would expect to deliver EBITDA of $12 million to $13 million. Our annual EBITDA under this scenario would exceed our current market cap.

If you hear some optimism from this team it is not because the market is great. Our tools business is near a five year low and we hear nothing from OEMs that would suggest any improvements in the near term.

AMHS bookings are up primarily on the strength of two large customers who happen to be the only two that are spending right now. We come to customers, because we have maintained the focus on leading the requirements of the richest and strongest players in the industry. However, when these customers are done with this project, we do not know when the next phases will come.

We do have confidence in this quarter and the March quarter, including an unanticipated backlog going into the March quarter to expect something close to break even results. Our stock has never been lower and we need to address debt covenants on top of managing customers and suppliers. But if we know anything, it is how to cope with the tough environment.

We have seen downturns before and we know what must be done. Our customers are incredibly supportive. They want to see us thrive to theses challenges and we will which is why we look forward to reporting to you of our next progress report next quarter.

With that, I will ask the operator to come back on so we can take you question.

Question-and-Answer Session

Operator

Ladies and gentlemen, we will now begin the Question and answer session. (Operator instructions) Our first question comes from Timothy Arcuri – Citigroup

Operator

Ladies and gentlemen, we will now begin the Question and answer session. (Operator instructions) Our first question comes from Analyst for Timothy Arcuri - Citigroup

Analyst forTimothy Arcuri - Citigroup

I wanted to ask, how do you see the ramp of the new products in this deteriorating and poor marketing environment? You have mentioned in the last call about shipping Falcon product at year end. How do you see that playing out? And you also mentioned, you were looking for margin improvement on the ramp of new products, thus you could address those?

Steve Schwartz

Well sure, still couple things, we were generating now about $10 million a quarter from new products, the parts that we talked about at the analyst meeting back in May, and it is the combination of several different products.

We are still on track with the qualification of the Falcon product. Specifically, it is going to be up to the shipping volume of the equipment makers that is the ways we were able to be able to ship product by year end, but the qualification is on schedule with three different customers right now.

Aaron Tachibana

Just to add, we actually had our first revenue shipments of the Falcon in the current quarter and we now apply a production in Singapore. So, ready to ramp as customers are.

Operator

(Operator Instruction) You have a follow up question from [Glen Promac] – [Broad View]

[Glen Promac – Broad View]

During the Analysts Day, there was some hope that you will be able to go to your customers and get paid for your service system capability for the fewer improving yields and proving spaces, maybe you get a portion of those savings, is that happening at all? I think that was maybe part of the Agile motivation program?

Steve Schwartz

The service business is increasing slightly this year. So, in a down environment that service business is increasing a little bit. It is really going to require a significant penetration of some of the Agile products before we will be able to cash our servers from those who remain confident that all of the Agile capability will go with the service component and the ability to capture some of the increased value of the customers. So, we still stand behind that, we are still confident that will happen, we will be able to demonstrate that after those products begin to deliver some revenue.

[Glen Promac – Broad View]

And then, on the debt are the banks that you are dealing with were they were able to go back to your customers and call just to get further assurance that the plumbing or guts, whatever you want to call it, located in your customers fab are essential to them, making chips than, and does that help out at all?

John Swenson

So, I do not know categorically that our bank has done that recently. When we initiated these loans, customer conversation were part of all their diligence. So, I do not know if there has been an update on their part, but they are certainly always welcome to and we will always provide that access that they ask for because we know we will get a good review from customers.

Steve Schwartz

And Glenn it has been a customary practice in Japan for Japan banks to visit Japan customers that is a very open channel and regularly used.

[Glen Promac]

And you won awards in Japan like you do? And I think, you are premier supplier status and does that –

Steve Schwartz

We have in Japan and in Taiwan.

Operator

Your next question comes from Analyst – J. P. Morgan

Analyst – J. P. Morgan

I have question about your AMHS orders in the September quarter. How do you think that will turn to revenue? Assuming one quarter is out, two quarter is out, and also, is it longer than your previous AMHS orders?

Steve Schwartz

So, the AMHS order will likely begin to revenue in the current quarter with majority in the March quarter and June quarter.

Analyst – J. P. Morgan

And this has typical of your previous AMHS orders. I am trying to get gauge as to what is the lead time for these orders.

Steve Schwartz

Yes, sure, it is very typical. It takes about three quarters on following the order for the revenue to be recognized.

Analyst – J. P. Morgan

So, are you seeing any push up in those?

Steve Schwartz

Actually, we have not. The customer is now ordering in phases and they are pretty care full about that. So, we pay attention to that every day. And yet, the order is pretty much on track for the AMHS.

Analyst – J. P. Morgan

Also one question about flat panel bookings for the September quarter, I did not quite get that number.

Steve Schwartz

Flat panel was $13 million.

Operator

Your next question comes from Jay Deahna – J. P. Morgan

Jay Deahna – J. P. Morgan

Steve, good afternoon. At your analyst meetings, you talked about adding some the Intrabay [21:22] conveyor technology and you also discussed basically the ability to improve production efficiency within semi conductor fabs and actually in fact reduced the number of process tools that would be required as a result. And you indicated that yourself that you might be able to get some value pricing associated with that solution as supposed to sort of a traditional kind of low margin cost plus pricing situation. I guess, we were probably about 90 days removed or so from your analyst meeting. I just kind of wondering, where that stands and how do you feel about that, any customer feedback or response to that? When you would expect to see your first orders reflecting that type of technology and enterprising?

Steve Schwartz

So, Jay couple of things. One, the first customer for this is now not the first customer for it, so we have had change in that where another customer stepped up while the first customer slows down a little bit. So, we still are very positive about the technology. We have begun to engage OEMs because they understand both opportunity as a threat for the change that might come as a result of productivity difference. We are now still working on getting the first Beta unit shipped. We hope it happens this quarter and the customers do understand exactly how we intend to ultimately to price it. I would say we have a mixed success so far. And customer on this, customers understand that not something will price that component at the time. But, at the same time they are going to want to see deliver the value and a real reduction in there at the cost and improvement and the productivity before they will agree to a structure like that. So I would say Jay, we were about half way there in terms of being convinced and we have a customers convinced that it will be entitled to a different means by which we will price.

Jay Deahna – J. P. Morgan

Is the timeline, expected timeline of getting first install into the field a little bit different than it was at the analyst meeting? Is that just the sign of the times? Or is it just gliding out of new technology.

Steve Schwartz

I think it is a little bit of both, we said at the analyst day that our fiscal year ending March we would like to have two installed, and we are still shooting for two installs. Quite frankly, we would imagine that we would have one already, and then we get safely with the other one. We are still intending to do two and we got some work to do.

Jay Deahna – J. P. Morgan

It is not a really busy call, so I am going to ask you a couple more of questions if you do not mind. This is kind of existential question and it kind of falls in line with the last question and that is, if you look at your market share and you contemplate the notion that in the sense, the semiconductor history could not really exist without you? But at the same time, the Company is constantly struggling to make compelling money. And it is obvious that the new technology that we were just discussing in an attempt in the part of Asyst to be more value added into generating better pricing and margin structure so that you could show some positive earnings momentum overtime. And I am just kind of wondering do the customer just not really view moving things from point A to point B is super high evaluated compared to affecting change and the surface of the wafer for device performance. What you are attempting to do, what you have to do in order to unleash value ultimately and drive, sustain positive earnings momentum. If you have trouble with this what is the alternative?

Steve Schwartz

So, jay I will answer your few part question, with a few pieces of answer. How about that?

Jay Deahna – J. P. Morgan

And If you think I am off base tell me I am just trying to figure it out.

Steve Schwartz

So there are IT manufacturers who can clearly understand the value of changes and improvement for the scheme for automation and frankly there are others who run a single

Device to a stat who really don’t want to spend on any change to a line that runs in one direction one way all the time. So we are working with the customers who we changed configuration, we have different loss types with different processing schedules inside the fab and we unsterdand there is enormous value to this and frankly there is large part of the customer that won’t see the benefit and wants to elect to try the benefits from a different technology until it has been proven for a few years. So it is not for everybody in the industry. We are committed to what our customers really believe in it and we are eeager to get some proofs out there. SO that’s the first part.

The other thing is Jay, Let me give you a little bit of a fact here. During the first three quarters of calendar 2008 our AHMS booking already exceed our fourth quarter of calendar 2007 and the gross margin now is beginning to shape uo so that we are driving the AHMS gross margin back up to 30% a place we haven’t been for a couple of years and we are confident that even the capabilities that we deliver to customers with the current with some additonal capablities of conveyors and smaller stackers that we are beginning to put in the fabs is allowing us both to have a little bit cost structure, little bit chance to hold price, allows us confidence top continue to invest in R&D and to deliver profitabilty and we think ourselves psitiones pretty well for how to that in March. The adpatation of this new technology with any new technology is going to take a little bit of time but we won’t spray the market with it we will continue to focus on thre or four cutomers and we think that is going to be the success path here. We are working really hard to get thjat done.

Jay Deahna – J. P. Morgan

That makes sense. The last one is there’s no question that AHMS is one of the first things that gets ordered when you fabs are coming up. So I think in the July call you were optimistic that you sw a pick up in AHMS orders for the second half that could have been potentially a winning indicator with the cycle and we all know that the world change and the last 90 days I think were a little bit more difficult. What are you hearing from ypour customers that they push out and cancelled, That they are just basically saying „hey memory prices are in the toilet and we will get back to you when the economic outlook chnages and the memory pricing picks up. Was this kind of a definite push out so did you get the sense that this whole thing dependent upon where the world goes or is there something more Company spoecific involved.

Steve Schwartz

Jay we stand by the view that we had in July. Our second halg order pattern is going to be higher than the first half. However we also discounted any of the DRAM potential investment that will take place. That is not something we counted on. I think saorund the time it is still net earnings season we heard people talking about some DRAM spending that might happen and didn’t imagine it could happen. Our Q3 calendar Q3, calendar Q4 bookings will be higher than Q1+Q2 and really on the backs of our very few customer who were pretty certain they will place orders.

Jay Deahna – J. P. Morgan

Then the absolute last question is given what you just said would you expect the process tool shuipments in the first or second quarter to be greater then the fourth quarter?

Steve Schwartz

You’ve imagine that could be the case but we are not just seeing it so again that’s a pretty tight channel right now. That’s one that is a little bit curious. The tool business isn’t following closely what we are thinking is order patter with AHMS.

Jay Deahna – J. P. Morgan

So in other words they are putting the infrastructure in place so that they can ramp tools quickly when they feel they need to but they are not following the normal timning?

Steve Schwartz

That’s correct and Jay some of the business that we have here talked about four projects that were of the order of $10 million. Some of those are for exmple are for FABRI configuration and so we will take orders for that but there is AMHS going on now wihtout the tool ordering pattern. We are not hearing anything about the tool ordering that ususally comes close behind us.

Operator

(Operator instructions) We now show no further questions at this time. I will now turn the call back for any closing remarks. Please go ahead.

Steve Schwartz

Thank you everyone we appreciate the interest in the Asyst and we do look forward to speaking with you next quarter. Thanks very much.

Operator

Ladies and gentlemen this does conclude Asyst Technologies second quarter 2009 earnings conference call. For a replay of today’s please dial 303-590-3000 or 1-800-405-2236 with access code 11121003#. Asyst will now thank you for your participation you may now disconnect.

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