Asyst Technologies, Inc. Q3 2009 Earnings Call

Asyst Technologies, Inc. (ASYT)

Q3 2009 Earnings Call

February 03, 2009 at 5:00 pm ET

Executives

Steve Schwartz - Chairman, President and Chief Executive Officer

Aaron Tachibana - Senior Vice President and Chief Financial Officer

John Swenson - Vice President of Investor Relations and Corporate Treasurer

Analysts

Brett Hodess - Merrill Lynch

Hari Chandra - Deutsche Bank

Presentation

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Asyst Technologies third quarter 2009 fiscal year conference call. During today's presentation, all participants will be in a listen only mode and following the presentation, the conference will be open for questions. (Operator instructions) As a reminder, this conference is being recorded today, Tuesday, February 3 of 2009.

At this time, I would like to turn the conference over to Mr. John Swenson. Please go ahead, sir.

John Swenson

Thanks you. Good afternoon everyone and welcome to this fiscal 2009 third quarter conference call for Asyst Technologies. Our financial results were released earlier today and are available on our website which is at www.Asyst.com. To access the release, interested parties should click on Investor Relations link followed by the Press Release link. I need to remind you 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 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. The fourth quarter came in on plan and on budget with three significant highlights in the form of very solid bookings, better gross margin and positive EBITDA in this very challenging environment. I also want to note that our performance for the quarter was impacted by the unprecedented volatility in foreign exchange rates during the quarter which resulted to both positively and negatively to some of the comparisons to prior period.

New orders in the quarter totaled $92 million, down from $107 million in Q2. AMHS orders of $84 million were flat with the prior quarter and were primarily driven by a new fab in Asia for a large customer as well as a large order from a new customer in Japan. The opportunities in the current environment are limited but we are gratified to have earned the market share and trust of the few customers that are buying.

Bookings of tool and fab automation products were just over $8 million, down from $23 million in Q2. This is consistent with the trend across the broader equipment industry. The metro new orders were as follows; semiconductor 75%, lab panel 10% and service 15%. OEMs represented only 7% of new orders and the remainder or 93% came from end users.

By geography, new order distribution was North America 15%, Japan 33%, Taiwan 5%, other Asia Pacific including China 44% and Europe 3%. Back log at the end of the quarter was $114 million, up from $91 million at the end of Q2. Of the $23 million increase in back log, $14 million was the upward adjustment for the change in the yen to dollar exchange rate.

Consolidated net sales for the fiscal third quarter were $83 million, down from $95.1 million in the prior sequential quarter. This was higher than our guidance primarily as the result of the stronger yen. Net sales of AMHS were $67.6 million, down from $70.1 million in the prior sequential quarter. Of this, semiconductor comprised approximately $58 million compared with $53 million in Q2. Lab panel disclose comprised approximately $10 million, down from $18 million in Q2.

Net sales of tool and fab automation solutions were $15.4 million, down from $25 million in Q2. Again, this decline is consistent with the recent decline among our OEM customers and the equipment industry in general. Overall sales mix was as follow; semiconductor 77%, lab panel 12% and service 11%. OEMs represented 10% of sales for the quarter. Consolidated gross margin for the quarter was 31%, up from 25% in the prior quarter. AMHS gross margin was 31%, up from 21% in Q2. The improvement in the third quarter was driven by continued cost reduction in our supply chain as well as better pricing across the largest projects.

We expect to again achieve at least 30% AMHS gross margin in the current quarter. If volume should drop further, it would be difficult to maintain this level but at average volumes of at least $65 million per quarter, we believe we can drive this business into the mid 30s as a percent consistently. Gross margin on tool and fab automation solution was 34% compared with 35% in the prior quarter. With sales up approximately 40%, we believe this is a respectable margin performance that would have been impossible without our outsourced manufacturing model.

Now, let us move on to operating expenses. Total SG&A and R&D spending was $27 million, down approximately $2 million from the Q2 level and down $4 million from Q1. Consolidated R&D expense was $8.6 million, down from $9.9 million in the prior sequential quarter. SG&A expense was $18.3 million, down from $19.4 million in Q2. We have reduced the cash breakeven level to approximately $70 million to $75 million as with the current quarter. The additional actions that already have been announced and already in process, we expect to bring our cash breakeven down to approximately $55 million for the June quarter.

Net interest expense was $2.6 million in the quarter. Other expense, primarily foreign exchange losses, was $2.8 million during the quarter. On a non GAAP basis, we are reporting a net loss of $4.8 million or $0.10 per share which compares to $7.8 million or $0.15 per share in Q2. Adjusted EBITDA for the quarter was a positive $0.4 million which compares with a negative $2.6 million in the prior quarter.

Now, let us turn to the balance sheet. We ended the quarter with $77 million of cash, down from $79 million at the end of September. That was up slightly on balance basis. All of the increase relates to the foreign exchange impact because all of the debt is denominated in yen. On a constant dollar basis, we paid more than $10 million of debt during the quarter.

Of the $159 million of debt in capital lease obligation on the balance sheet as of December, $76 million is short term revolving debt borrowed to a number of banks in Japan. This debt does not carry any substantial covenant or collateral requirements. Approximately $80 million of the total debt is drawn under the term loan that matures in July of 2012. The loan is borrowed in yen to a group of four US banks and carries a number of financial covenants that have been renegotiated to amendment last year.

We were in compliance with these debt covenants as of December 31. Those debt covenants were last negotiated back in the September timeframe based on the very different outlook from what we see today. As a result, we have higher covenant requirements related to the current quarter ending in March and as previously disclosed we believe it is probable that we will need a waiver or amendment of certain of these covenants as of March 31. Because of this, accounting will dictate that all of the term loans must be classified as current on the balance sheet even though the maturity and repayment schedule of debt still extends into 2012. We are working with our US bank group to obtain a new structure that will provide additional long term operating flexibility and liquidity. This also should allow us to reclassify the debt as long term on the balance sheet.

Now, to our outlook for the fiscal fourth quarter ending in March. We expect sales to be in the range of $65 million to $75 million with AMHS in the range of $55 million to $60 million, and tool and fab automation at $10 million to $15 million. We expect to report a non-GAAP net loss of $0.15 to $0.19 per share, and a GAAP net loss of $0.20 to $0.25 per share. The GAAP net loss is expected to include $3 million to $5 million of restructuring charges related to our cost reduction initiatives.

In Q4, we expect to again deliver positive EBITDA. Moving forward, we believe we can maintain positive EBITDA assuming sales levels of at least $55 million per quarter and we are poised for additional cost reduction actions if the environment should deteriorate. With our system of operating cash flows, we have cash needs in the current quarter that will drive down the cash balance from the current level. As we disclosed previously, current existing agreement will purchase the remaining 4.9% of our AMHS business from Shinko Electric in late January. This resulted in a cash outlay of approximately $14.4 million but will save approximately $1.7 million annually in dividends and interest.

That concludes my formal comment so I will turn it over to Steve Schwartz. Steve?

Steve Schwartz

Thank you, Aaron. We recognize that these are extraordinary times for the global economy with severe implications for our industry. A year ago at this time, we thought we were in a midst of a largely DRAM driven downturn and we look forward to a potential return to growth by the end of 2008.

At last fall, it became clear that we were all facing something much more profound than a typical supply-driven equipment downturn. We took aggressive steps in our fiscal third quarter to take costs out of the business. Consistent with our guidance in the third quarter, we also realized a significant improvement in gross margins driven by better pricing on key contracts, better management of projects and continued cost reductions in our supply chain and our own manufacturing operations. All of these efforts contributed to the positive EBITDA performance in Q3 and we will deliver additional cost savings in the current quarter based largely on actions already taken in Q3.

We are now taking steps to further reduce expenses which will lead to savings in our fiscal Q1. We have kept the priority on retaining key people and funding new product development programs, which means the cost of certain non-labor expenses, are in the range of 60% to 70%. Entering next quarter, our headcount will be down approximately 20% from where we were at the end of September but our personnel-related spending will be down approximately 40% as the results of shutdowns, executive salary cuts and certain reduced benefits.

At our new level, we still will have close to 1,000 employees. We are retaining the knowledge and talents that supports current and future products as well as our ability to meet customer demands in the field. Of course, this also means that we have additional room to reduce expenses if necessary. We have enough visibility today to say that $55 million is a reasonable breakeven level entering the June quarter. While we acknowledge that the environment is dynamic and still biased to the downside, we are very focused on the signals from our customers and the rest of the electronic supply chain that will indicate how deep and how long this downturn will be.

Amid the gloom, we also acknowledge that our AMHS business is holding up better than almost any other segments in the industry including our own tools business. The biggest reason for this is our AMHS customer base. To the best of our knowledge, there were only two significant AMHS contracts ordered globally in the December quarter and Asyst won them both. One of these is a large logic fab in Asia. This particular customer used to split the AMHS business between Asyst and a competitor but for this fab, they elected to go with the single supplier and we won the business. We have worked very hard to retain and increase our share with this customer and it has been rewarded with this large and very timely contract.

The other large project is for a new customer in Japan. This customer produces the chip for a popular game platform and previously did not have automation in their fab. We will be automating this fab while the customer continues to run wafers and we also have the opportunity to place some of our advanced conveyor and buffering solutions in high-need areas.

Looking ahead, we are confident in our positioning for the current environment and for an eventual loss turn. First we have products that customers need and we have customers that are still spending. This allowed us to build back log over the last two quarters which provide the partial bridge across the March and June quarters which we will expect will show much lower bookings.

Second, we have cut cost dramatically and delivered higher margins despite lower sales. This draws positive EBITDA in the quarter and positions us for continued positive EBITDA performance at currently expected sales levels. This margin and cost base also positions the Company for an eventual upturn when we believe the leverage on increase sales will be substantial.

Third, we are working the strength in the balance sheet. However, with our new rate of expected cash flow, we believe that it is strong enough to sustain the Company through this period. And finally, while our plan is necessarily focused on being sized properly for the current economic reality, our number one focus remains long-term profitable growth and market leadership. We are taking advantage of this very slow time in the market to take our new factory productivity technologies into existing factories. We have capabilities that we will install into fabs that are already automated with conventional AMHS systems and we expect to demonstrate productivity improvements with local installations of the conveyor and buffering solutions.

We have successfully penetrated five factories at four different customers with these technologies thus far and we want to double these numbers in calendar 2009. These will be important proofs for our customers as they prepare design and layout of their next fab investments and we provide a platform for Asyst to gain market share coming out of the current economic downturn.

This concludes our formal comments and now, I would like the operator to come back on so we can take your questions. Operator?

Question-and-Answer Session

Operator

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator instructions) Your first question comes from the line of Brett Hodess - Merrill Lynch.

Brett Hodess - Merrill Lynch

Steven, I am wondering if you can talk a little bit about the decision process for the customer not using dual source and you getting the whole fab. Do you think that in this tougher environment with customers that do not want to screw around as much that you are having more chances with your big customers to get the whole fab, if you will kind of thing?

Steve Schwartz

Brett, I think so. I think we are getting to 300 mm and automation was brand new at the beginning of the 300 mm generation. I think people understand the technical capability exists now and the differences between the three major suppliers of AMHS and so rather than having to make technical decisions, I think these are economic decisions that are considerably lower risk now that they have proven suppliers that they have been able to evaluate over the years. So, I think you are absolutely right in economic decision and the fact that we have been able to demonstrate reliable and dependable technology over the years is what allowed the win.

Brett Hodess - Merrill Lynch

It seems like though you are able to do it with much better margins than you did in the past, even though it is an economic decision rather than a technical decision.

Steve Schwartz

Yes, Brett actually we somehow successfully masked the better gross margin we had on the lot of the projects. We were really saddled by a pretty large project with a lower margin that dragged the whole business down. We have been able to improve that single customer margin performance, if you will, and now the rest of the performance improvements in the AMHS business are beginning to show through.

Brett Hodess - Merrill Lynch

Okay and then I wonder if you could just settle on a little bit on the two other questions. On the cost side, as you head down to that $50 million to $55 million breakeven level, can you sort of give us an idea of how much of the cost savings that you are getting to go down there are temporary, the layoffs. I have seen in the reduced pays and things like that versus permanent so that we can get an idea that when revenues grow again, how much extra leverage might we see or how much leverage might we not see because a lot of temporary things might have to come back on?

Aaron Tachibana

Hi, Brett. This is Aaron Tachibana. With regards to the reduction, most of the reductions are permanent in nature. Very little is temporary. We do have some temporary items such as shutdowns and time off and things of that nature that we hopefully can come back down the road but those are going to be a smaller percentage. So, I would say less than 10% is temporary, the bigger percentage is permanent in nature in terms of headcount reductions, reducing discretionary spending across the board and should business come back, some of the discretionary spending that we turned off, we will be very selective in terms of where we will let that increase again.

Brett Hodess - Merrill Lynch

Okay.

Steve Schwartz

Brett, specifically we still are managing with two supply chains and so there is a concerted effort to get this transformation completed. So, as business picks up at a time business picks up, those changes will be in full effect.

Brett Hodess - Merrill Lynch

Okay, and then the final one, if you could, you gave a good explanation on the debt side of the business but are there particular obstacles in getting the four US banks to agree to amend or a waiver, whatever, things by the end of the quarter as you said or do you think…could you give us some color on how much risk there is I guess to that?

Aaron Tachibana

Yes, so Brett, this is Aaron again. So, in terms of what is going to take to move forward here, so the banks are starting to understand our business pretty well. They have been with us for a couple of years now and although the cyclicality and the downturn have not been as severe as it is today, this is a global economic problem. So the banks all realize that. In terms of getting them even more comfortable with where we are at, we are going to projections in details at this point in time and basically, the comfort level is going to come from how long this down period will last, how low can business go and how long it may remain there. So we are going to some of those discussions today and we anticipate having something concluded here within the next four to six weeks. That is our target and we are working towards that and thus far, the banks have been very cooperative and we have had several discussions via telephone and face to face and that will continue until we conclude this.

Operator

(Operator Instructions) Your next question comes from the line of Hari Chandra - Deutsche Bank.

Hari Chandra - Deutsche Bank

I just wanted to know more on the orders with the strong Japanese yen and the key reason for getting the new orders.

Steve Schwartz

Yes, hi. I am sorry, one more time with the question.

Hari Chandra - Deutsche Bank

Is the strength of the Japanese currency a key reason for you getting the new orders in the quarter?

John Swenson

Hi, it is John. Actually, one small contract was yen denominated. Actually our biggest piece of business was actually US dollar base. Actually it was not a benefit. In fact, it is just the opposite in terms of the customer, impact on pricing to the customer.

Aaron Tachibana

The yen reference was merely that it started to grow the back log as we translated the backlog at the new dollar/yen exchange rate.

Hari Chandra - Deutsche Bank

Now, I am asking about the competitors. The competitors are Japanese?

Aaron Tachibana

Right but the business was led in US dollars. So it was not really relevant.

Hari Chandra - Deutsche Bank

With the back log, can you give a little make up of the back log? How much is shippable in the next six months, nine months just with the timeline?

Steve Schwartz

We anticipate that almost all the back log will ship certainly by the end of the September quarter at a majority likely probably 80% by the end of the June quarter.

Hari Chandra - Deutsche Bank

And also in terms of the cost end that you are talking about, how do you split that in terms with the cost line and how much of it is coming from the OpEx?

Aaron Tachibana

Hari, this is Aaron. With regards to the splits, the cost line is probably 20% to 25% with the rest in OpEx.

Operator

(Operator Instructions) Management, we have no further questions at this time. Please continue.

Steve Schwartz

Okay, well we would like to thank everyone for your time and interest in Asyst Technologies and we look forward to speaking with you after the close of the next quarter. Thank you.

Operator

Thank you, sir. Ladies and gentlemen, if you would like to listen to a replay of today's conference, please dial 1800-405-2236 or 303-590-3000 using the access code of 11126030#. That does conclude the Asyst Technologies third quarter fiscal 2009 conference call. Thank you very much for your participation. You are using AT&T Teleconferencing. You may now disconnect.

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