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Amtech Systems Inc. (NASDAQ:ASYS)

F1Q2014 Results Earnings Call

February 6, 2014 5:00 PM ET

Executives

J.S. Whang - Executive Chairman

Fokko Pentinga - President and CEO

Brad Anderson - Chief Financial Officer

Analysts

Jeff Osborne - Stifel

Mark Miller - Noble Financial Capital Markets

Gordon Johnson - Axiom Capital Management

Operator

Good day, everyone. And welcome to the Amtech Systems First Quarter 2014 Financial Results Conference Call and Webcast. All participants will be in a listen-only mode. (Operator Instructions) After today’s presentation there will be an opportunity to ask questions. (Operator Instructions)

Please also note that today’s event is being recorded. At this time, I’d like to turn the conference call over to Mr. Brad Anderson, CFO. Sir, please go ahead.

Brad Anderson

Thank you very much. Good afternoon. And thank you for joining us for Amtech Systems first quarter fiscal 2014 results conference call. On the call today are J.S. Whang, Amtech's Executive Chairman; Fokko Pentinga, our President and Chief Executive Officer; and myself, Brad Anderson, Chief Financial Officer.

After the close of trading today, Amtech released its financial results for the first quarter fiscal 2014 ending December 31, 2013. 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 guarantees 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 and volatility in the demand for our products; the effect of changing worldwide political and economic conditions, including government-funded solar initiatives; capital expenditures; production levels, including those in Europe and Asia; the effect of overall market conditions, including the equity in 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.

J.S. Whang, our Executive Chairman, will start our discussion today. Fokko Pentinga, our President and Chief Executive Officer, will update you on our views of the current market and how we continue to align our global organization with market demand, and I will then discuss first quarter fiscal 2014 financial results.

So I’ll now turn the call over to J.S. Whang, our Executive Chairman to begin the discussion. J.S.?

J.S. Whang

Thank you, Brad. Good afternoon. Thank you for attending today and we really appreciate your interest in Amtech Systems. I am pleased to say that we executed well in Q1. We shipped $24 million, which resulted in very close to $15 million in revenue.

We are particularly proud of our team for further advancing our high-efficiency N-type technology in the marketplace by completing and delivering on order from Bison Solar, previously known as Nexolon.

Recognizing the importance of technologies role in future solar growth we are continuing our intense efforts in technology advancement and product development programs throughout the down cycles.

As a result, more and more customers are engaging with us for their current and future technology and production solution needs. We truly believe the future demand for leading-edge solar technologies represents significant opportunity for both our long-standing Tier 1 customers and Amtech.

An important point regarding the industry opportunity is that, the solar market is really becoming global. Most of the major countries are now showing solar growth and the biggest power consuming countries are also the biggest drivers of solar demand.

Solar costs have come down significantly in the past two years. And Deutsche Bank will cash deed that more than half of global solar market will be available for a non-subsidy business model in 2015. Solar is a core component of our future products. We are excited about our long-term opportunities and we look forward to fully participating in the next solar growth cycle.

Our CEO, Fokko will further update you on our progress. I will now turn the call over to Fokko. Fokko?

Fokko Pentinga

Thank you, J. S. We are pleased to report improved results in the quarter on many key value driving metrics. The improvements was driven by excellent execution of shipment of both solar and semiconductor customers, validating the ongoing value of our business mix.

We shipped over $24 million of products and services. While we did the first substantial amount of revenue, that revenue when related to profits, which would have substantially improved our bottom line this quarter, will now benefit us in the future. Although, we saw progress in the quarter, we are still operating in a soft demand environment.

We have maintained a constant dialogue with our customers and at this time, we look to the second half of 2014 for further strengthening in the demand for our products with 2015 expected to be even better. We believe the end market demand for solar products around the globe is strong indicator for our business and what we see as inevitable next capital spending cycle.

As J.S. said, the global market for solar is growing rapidly in many regions around the world. We had higher capacity utilization during the quarter and our employees performed very well and they delivered high-performance, next-generation technologies to our customers.

We are well-positioned to meet this anticipated upturn in demand. We continue to advance our INM plant, the n-type cell and the PECVD technologies. Our customers indicate interest in these technologies and we believe PECVD alone has toppled our addressable market. These technologies are being developed to meet the specific goals of our customers, which are to produce higher efficiency solar cells at lower cost of ownership.

In regards to the other markets we serve, we continue to see improvement in the semiconductor market and expect the segment of our business to improve over fiscal 2013 levels, which is the LED and other sapphire markets. We continued to see strong demand for our templates and carrier products, which are used in the lapping and polishing of sapphire, silicon and silicon carbide wafers.

Brad will now discuss the first quarter results in more details. Brad?

Brad Anderson

Thanks, Fokko. Net revenue for the first quarter of fiscal 2014 was $14.8 million, compared to $6.9 million in the preceding quarter and $9.4 million in the first quarter of fiscal 2013. The increases are due primarily to large shipment of our n-type cell technology, partially offset by deferred revenues.

According to our revenue recognition policy, 100% of the revenue and cost of the PECVD shipments were deferred until they are accepted by the customer. Contributing to our increased revenues was an upturn in our semiconductor customers’ capital equipment purchases.

Our total customer orders in the first quarter of fiscal 2014 were $9.8 million, of which $2.2 million were related to solar, up from the total orders of $8.4 million in the fourth quarter of fiscal 2013. This compares to total orders of $5 million in the quarter a year ago.

At December 31, 2013, our total order backlog was $23.3 million compared to total backlog of $26.8 million at September 30, 2013. Our backlog at December 31, 2013, includes $14.1 million in solar orders and deferred revenue compared to solar backlog of $17.1 million at September 30, 2013.

Foreign exchange caused $400,000 increase in our backlog in the December quarter due to the strengthening of the euro versus the U.S. dollar. Backlog includes deferred revenue and customer orders that are expected to ship within the next 12 months.

Gross margin in the first quarter of fiscal 2014 was 31% compared to 46% in the fourth quarter and 15% in the first quarter a year ago. The margins in the fourth quarter of fiscal 2013 reflected a high percentage of net revenue resulting from the recognition of previously deferred profit.

Our margins improved from a year ago due primarily to increased sales volumes, expense reductions from a companywide cost control initiatives and use of previously written down inventory. SG&A expenses in the first quarter of fiscal 2014 were $4.1 million compared to $3.2 million in the previous quarter and $4.3 million in the first quarter a year ago.

The sequential increase in SG&A results primarily from increased commissions and shipping expenses related to higher revenues. Compared to the first quarter a year ago, our SG&A was lower due to the savings from a companywide cost control initiatives, including lower salaries and benefits and lower stock-based compensation, which was partially offset by higher commission expense related to higher revenues.

Research and development expense was $900,000 in the first quarter of fiscal 2014, compared to $1.5 million in the preceding quarter and $1.2 million in the first quarter of fiscal 2013. Reduction in net R&D expense is primarily due to the recognition during the quarter of a significant amount of government grant funding.

Depreciation and amortization in the first quarter of fiscal 2014 was $623,000 compared to $653,000 in the preceding quarter and $699,000 in the first quarter of fiscal 2013. Included in the first quarter of fiscal 2014 results is $176,000 stock option expense compared to $159,000 in the preceding quarter and $433,000 in the fiscal first quarter a year ago.

Income tax expense in the first quarter of fiscal 2014 was $560,000 compared to $580,000 in the fourth quarter of fiscal 2013 and the tax benefit of $480,000 in the first quarter of fiscal 2013. Despite the pretax loss for the quarter, we recognize tax expense due primarily to losses and tax jurisdictions where we cannot recognize past tax benefits because we do not have a history of earnings for we have cumulative losses.

Also as we near breakeven for book purposes, permanent tax differences and other adjustments can have a significant effect on what is reported in the income statement. Net loss for the first quarter of fiscal 2014 was $800,000, or $0.08 per share, compared to a net loss of $1.7 million or $0.18 per share for the fourth quarter of fiscal 2013. The net loss for the first quarter a year ago was $4.2 million or $0.44 per share.

Total revenue by geographic region for the fiscal first quarter was North America region at 42%, Asia-Pacific region at 33% and Europe at 25%. Our financial position remains strong with essentially no debt and total unrestricted cash and cash equivalents of $30.3 million compared to $37.2 million at September 30, 2013.

The decline in cash is due primarily to the high volume of shipments in last month of the quarter that resulted in an increase in receivables. In January, just this past month, we received a tax refund of approximately $5.4 million. At December 31, 2013, we had working capital of approximately $43.1 million.

This concludes the prepared remarks section of our conference call. Operator, please open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Jeff Osborne from Stifel. Please go ahead with your question.

Jeff Osborne - Stifel

Great. Good afternoon, guys. Just a couple quick questions here. Brad, on the tax refund you mentioned, the $5.4 million of cash received in Q1. Is there an income statement impact to that for the upcoming quarter that we should be thinking about? And then also the receivables for the shipments on the last month of the quarter, would you expect to get that cash in the March quarter as well?

Brad Anderson

Yes, on the tax refund, there's no P&L affect of that that was reflected already in the past financial statements, so it's just a refund from our Dutch taxes that were paid.

As far as timing on the accounts receivable, that will depend on, this is -- a lot of that's related to the n-type cells line has been started up in the San Antonio. So a lot of that depends on timing of all the equipment and facilities coming ready and installed and geared up. So that timing is still -- could be a quarter or two away.

Jeff Osborne - Stifel

Okay. And then on the R&D drop, you talked about the government grant funding. I assume will revert back to that kind of mid-1.5ish type million range on a run rate basis going forward or is there a residual trail of that government grant funding still kicking in here in the March and June quarters?

Brad Anderson

Well, we really would like to see that grant funding and what we expand the linear. It doesn't happen that way unfortunately because we have to evaluate where we are at as far as the government in their audit and how that money is being spent and all those things make the timing of it become lumpy.

As far as going forward, we don't get granular on the expectations for R&D on a forward-looking basis, but we continue to make investments at Tempress and at Kingstone. And Kingstone as we disclosed in our filings does have money, the grant money that's being used to for other projects and a lot of that’s flowing through on the R&D side, but not having an impact on Amtech cash.

Jeff Osborne - Stifel

Got you. And then, I assume on a tax expense, are you talking about the jurisdiction changes, is that just as the US becomes a bigger piece as the San Antonio project kicks in that you would then become more of a taxpayer than you might have been if you're shifting to China or is there a different moving factor there?

Brad Anderson

Yes, it would be nice if we could move the income around as easy as that, but unfortunately it depends on the jurisdiction in which the income has been derived and the Tempress is the one who is generating the income related to the San Antonio project. So that will be taxed primarily in the Dutch, in the Netherlands.

Jeff Osborne - Stifel

Got you.

Brad Anderson

And so the losses that have been incurred primarily in China and other outside of the US are requiring that we cannot record a tax benefit for GAAP purposes here.

Jeff Osborne - Stifel

Okay. So in terms of looking at that backlog and shipments over the next couple of quarter probably tax rate would be or tax expense on a dollar basis is fairly consistent with the current mix of customers or is that…

Brad Anderson

It’s tough. In my prepared remarks I mentioned as you get closer to kind of breakeven these adjustments that occur from tax to book can have significant impact on the effective tax rate, so that’s kind of difficult. The good thing, one good thing though is these losses, they have been generated as they start to turn to making income. For example in the Netherlands too, they will be able to shelter some of that income from these NOLs.

Jeff Osborne - Stifel

Got you. And just two other quick accounting questions and then one for Fokko on the revenue acceptance, can you just remind us what your kind of timing expectations are for the PECVD portion that’s been deferred and then also the timing of the ECN shipment for ion implanters when that have an impact on the two latest units that you shipped in the past in terms of rev rec of that?

Brad Anderson

Yeah. As it relates to steeping your focus -- as far as accounting is concern, the PECVD will get a recognition, is because of new technology until we get to customer acceptances of the like type equipment, which obviously this would be, that we have to differ. So once that acceptances occur then we will be able to recognize.

As far as the timing, we just haven’t got granular on that just because it’s dependent on how faster that can ramp up. The equipment can get installed, all the vendors install their equipment and we ramp up and meet some of the minimum efficiencies on the line to be able to then get that initial customer acceptance.

Jeff Osborne - Stifel

Okay. And what about the INM plant piece, because when you have the same treatment so, when the ECN is shipped with that and kind of revert the INM plant revenue for the unit you shipped in the past?

J.S. Whang

Yeah, we should see some benefit from that, yes.

Jeff Osborne - Stifel

Okay. Any sense of when?

J.S. Whang

We haven't gone that granular as far as the timing of that shipment.

Jeff Osborne - Stifel

Okay. And then just last one for Fokko, I apologize for other questions. But just from a macro perspective, you seem pretty upbeat about the second half of the year. What types of programs are you seeing, your customers talk about it, are these new Greenfield factories, or you seeing people just kind of do drop in replacements on existing facilities?

And then you mentioned the global nature of the demand. Are you seeing any aspects of the global nature of production? You saw Saudi Arabia with news from a competitor this week about feasibility studies. There is some stuff going on in Africa. Just curious what you're seeing potentially outside of China.

Fokko Pentinga

Okay. Well, first and luckily, it’s in mix. It's not just Greenfield, new fabs. It's a mix so. What we do see is already now that Taiwan and Korea are really a lot more active than before. So that's where it really starts first. And in China, it is a mix. There are some just expansions and that is in China basically, what's happening real new fabs.

You can't expect that in China that's also where the government there tries to pretend. So that’s -- China is mostly additions to existing lines, some of which have already been planned quite some time ago. And of course outside China, there are some plans from several companies. But that is still mostly in Asia. If you look at the Middle East, yes, there is definitely activity.

And we do see that there is a market that really can become strong. Although in some countries, things to take a lot more time as sort of bit like India where a lot of is announced and then it takes a bit of time to actually happen. But contrary to India and at least in the Middle East and Saudi and some other countries there, financing is not the issue and they are really committed now to go this way. So, yes, that's also an area where we do see a lot of growth. If you look at Africa, yes, there are plans but I would see the Middle East as a higher potential at least in the next year.

Jeff Osborne - Stifel

Well, thank you. Appreciate all the detail.

Fokko Pentinga

You are welcome.

J.S. Whang

Thank you, Jeff.

Operator

Our next question comes from Mark Miller from Noble Financial Capital Markets. Please go ahead with your question.

Mark Miller - Noble Financial Capital Markets

I’m just wondering, what are you seeing or expecting in terms of consolidation of solar industry in China. I think the government has been talking about that, are you seeing tangible steps there?

Fokko Pentinga

Yeah, it is not that there are the larger companies that are really closing down. And we’ve only seen that with some tech and even their parts have of course continued. But it is going in smaller steps in real big closures, not. But it is definitely a difference from the few years ago that everybody starts to increase and if you look now and all the people that we know of that are really having some plans to add. It is not those Tier 3 that are doing that. But it's a slower process that is not force that people are really shutting down but it's definitely a big change compared to some than a year ago.

Mark Miller - Noble Financial Capital Markets

Could you express optimism about seen improvements in the semiconductor industry, is this more from the LED side, because as you probably know Intel, Samsung and Taiwan Semiconductor for the first time many years projected flat CapEx this year? I'm just wondering, where you're seeing those improvements specifically or expecting that?

Fokko Pentinga

Yeah, okay. If I look at semiconductor, it’s really in the analog for the automotive and have several companies in that area, which are very good customers and there is still growth there. And sapphire is another area where more and more components are used, for example on the phones for the fingerprint and for the lenses and even talks about having the whole front side touchscreen in the future being made of sapphire. That makes a lot of difference because if you have all of the cell phones, the little cameras and there is a lot of them there and they of course a lot larger than just a very tiny pieces that go in each and little individual LED.

But LED is also picking up, it had a very slow period in the last years but now it's really moving forward, and at the same time sapphire for mobile communications and that sort. So there is a lot of activity and an increase in area. We are not really involved in the DRAM or in the microprocessor area so that doesn't really hurt us that is more into analog. Okay.

Mark Miller - Noble Financial Capital Markets

And finally, you expressed optimism about the second half of the year and I'm just wondering if you could give us any more color, what's going with the I&M plant calls, is that why you're optimistic or you think that's going to becoming a bigger part of you in the second half of the year?

Fokko Pentinga

The optimism for the second half of the year is that we see projects that are becoming closer to a decision point so and the second half of the year is giving us with these mature and order still need to come, but that gives a good chance for second half, especially on orders but even some shipments in the second half that could improve. And it's just customer context knowing what's happening and again most of this still is in Asia.

Mark Miller - Noble Financial Capital Markets

Does this include ion implanters?

Fokko Pentinga

Ion implanters, there is potential there and of course our organization from the ion implant is not as big, but there is potential for ion implant as well, but that is not the origin of the statement that we see improvement for the second half.

Mark Miller - Noble Financial Capital Markets

Thank you.

Operator

(Operator Instructions) And our next question comes from Gordon Johnson from Axiom Capital Management. Please go ahead with your question.

Gordon Johnson - Axiom Capital Management

Thanks for taking my question guys and congrats on a good quarter.

Brad Anderson

Thank you, Gordon.

Gordon Johnson - Axiom Capital Management

So I guess a lot of the questions have been answered, but I guess just anecdotally if you guys had to say what really drove the strength this quarter I guess versus expectations, what would you say?

Brad Anderson

I would say that the driver was the shipment of the most of the equipment related to the San Antonio order that we have previously announced, discussed but due to some great operational execution, we're able to shift back in the December quarter.

Gordon Johnson - Axiom Capital Management

Okay. So we should expect maybe the fundamentals to weaken a little bit next quarter sequentially?

Fokko Pentinga

Well, you guys you always look to the order book and you can see what's happening there, but we haven’t announced another San Antonio project lately so.

Gordon Johnson - Axiom Capital Management

And I guess the question was asked on kind of what's behind the impetus for your optimism in the second half. But I mean is it fair to think we'll start to see some ramp up of -- or even replacement of equipment in the second half helping your orders improve?

Fokko Pentinga

It's a combination, it is not just the orders in the second half because that still further away but also some improvements in shipments in the second half of this year is what we expect. And again the market is -- we see an improvement, but we've seen this market go in ups and downs. From what we see now, it's definitely moving in the right direction, but there was always things that could change that again. But from now, at this moment it looks a lot better.

Gordon Johnson - Axiom Capital Management

Okay. And then lastly, it looks like there was some cash burn. Is that primarily due to the increase in accounts receivable?

Brad Anderson

Yes. If you look, we actually from -- take the pre-tax or operating loss and look at what we -- what our non-cash items were related to depreciation and everything else. There was really no burn through the P&L. It’s all through investment in working capital.

Gordon Johnson - Axiom Capital Management

All right. Okay. Congrats guys.

Brad Anderson

Thank you.

Operator

And at this time, I'm showing no additional questions. I'd like to turn the conference call back over to management for any closing remarks.

Brad Anderson

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

Operator

And ladies and gentlemen, it does conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your telephone lines.

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