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Amtech Systems, Inc. (NASDAQ:ASYS)

Q2 2014 Results Earnings Conference Call

May 07, 2014, 05:00 PM ET

Executives

Jong S. Whang - Executive Chairman

Fokko Pentinga - President and CEO

Bradley C. Anderson - EVP, Finance, CFO, Treasurer and Secretary

Analysts

Mark Miller - Noble Financial Capital Markets

James A. Bardowski - Axiom Capital Management

Operator

Good day, and welcome to the Amtech Systems Second Quarter Fiscal 2014 Financial Results Conference Call. All participants will be in listen-only mode. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference call over to Mr. Brad Anderson, Amtech's Chief Financial Officer. Please go ahead sir.

Bradley C. Anderson

Thank you, Denise. Good afternoon and thank you for joining us for Amtech Systems second 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 second quarter fiscal 2014 ending March 31, 2014. 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; overall -- the effect of overall market conditions, including the equity and credit markets and market acceptance risks. Other risk factors are detailed in our Securities and Exchange Commission filings, including our Form 10-K and Forms 10-Q.

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

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

Jong S. Whang

Thank you, Brad. Good afternoon. It is a pleasure to have you all again today. For the many of you who'd have joined our calls before thank you for your ongoing interest in Amtech. For those who maybe joining us for the first time we really appreciate your interest and participation today. We are pleased to report that our Q2 reflects solid progress we made in the first-half of current fiscal year. Fokko will discussion the details of our Q2 progress shortly.

We continue to plan for what we see as an exciting future for Amtech. As the solar energy costs continue to decrease for the end market the demand for solar as an affordable clean energy has increased at compounded annual growth rates. We believe our ongoing investment in advancing our technology solutions and product development programs balanced toward our diligent focus on managing expenses and cash is a winning combination for near and long-term success.

The largest global economies, U.S., China, Japan and EU continue to support solar expansion as on attractive solution to climate change. Renewable power standards mandated by governments are driving the development of utility scale project and resulting in long term power purchase agreements.

The growing interest in solar goes well beyond established markets with the new emerging solar market growing to 8 gigawatt to 10 gigawatt annually, solar is truly becoming global. We are excited about Amtech's future. Given industry forecasts which point to a global solar market that is expected to grow at a significant double digit pace for the foreseeable future, we are looking forward to fully participate in this exciting global solar opportunity.

And now I will turn this discussion over to our CEO, Fokko who will discuss our Q2 progress and current market activities in more detail.

Fokko Pentinga

Thank you, J. S. We had good bookings in the quarter with $21.5 million in orders. This is our highest booking level in three years. These new bookings result in a healthy backlog and solid book-to-bill ratios for the consolidated businesses and solar specifically.

Today we also announced an addition of $10.5 million in solar orders received so far in the June quarter. So a good start for our fiscal third quarter and a good indication that we are fully participating in the opportunities that are currently present in the market.

We are pleased to announce that during our fiscal second quarter we received our second production order for our PECVD system. We brought this technology into market in 2013. During the downturn we stayed committed to our research and development plans and our PECVD tool is one of the outcomes of that investment. We believe it will double our served addressable market.

As we have announced in earlier quarters we produced and shipped our diffusion and PECVD system to Mission Solar Energy's San Antonio facility and are currently installing and setting up the equipment in its lines. [Green RB] the main contractor for this Mission Solar Project recently entered insolvency proceedings under self-administration. Unfortunately this has resulted in Amtech taking an expense of approximately $1.8 million in the March quarter.

From notification of these proceedings we engage in discussions with the key project participants and worked out at a framework to move forward that we believe will ensure a successful outcome of Phase 1. Beyond the write-off in Q2 we anticipate no further financial impact.

While demand for new solar equipment remains soft with customers still being very cautious about their investment in new equipment we do participate in selected opportunities. At this time, our sales and marketing activities in Asia, in EMEA and other regions of the world include meaningful discussion with current and potential customers.

Our prospect pipeline is bigger today than it has been in the last two years. We continue to advance our Ion Implant, our N- type cell and PECVD technologies and we shipped the Kingstone Ion Implant to ECN and expect to install and start development efforts on higher efficiency cell technology in the coming months.

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

In conclusion, we are excited about our future and we look to fully maximize our expanding opportunities. Our team performed very well in this first half year, this fiscal year responding to customer need and proving that our streamlined manufacturing organization is well positioned to serve customer's current and future needs.

We are optimistic that the second half of 2014 will reflect an improved demand for our products and its further growth in 2015 when there is expected to be more balance between the solid cell production capacity and the demand.

I will now turn the discussion over to Brad, who will review our second quarter financial results. Brad?

Bradley C. Anderson

Thanks, Fokko. Net revenue for the second quarter of fiscal 2014 was $12.7 million, compared to $14.8 million in the preceding quarter and $8.1 million in the second quarter of fiscal 2013. The increase compared to last year is due primarily to improved demand in all market segments partially offset by lower recognition of previously deferred revenue.

Customer orders in the second quarter of fiscal 2014 were $21.5 million, including $13.6 million of solar, up substantially from the previous quarter and the quarter a year ago. At March 31, 2014, our backlog was $31 million, up 33% compared to backlog at December 31, 2013 and includes $20.5 million that are solar related. As a reminder backlog includes deferred revenue and customer orders that are expected to ship within the next 12 months.

Gross margin in the second quarter of fiscal 2014 was 23% compared to 30% in the second quarter of fiscal 2013. The lower margin resulted primarily from lower recognition of previously deferred profit which was a high percentage of net revenue in the second quarter of fiscal 2013.

SG&A expenses in the second quarter of fiscal 2014 were $5.3 million compared to $4 million in the second quarter of fiscal 2013. Included in SG&A expenses in the second quarter of fiscal 2013 is approximately $1.4 million of bad debt expense primarily related to one customer.

Research and development expense was $2.2 million in the second quarter of fiscal 2014, compared to $1.9 million in the second quarter of fiscal 2013. The increase in R&D expense is primarily due to higher activity and development of additional markets for the ion implant technology.

Depreciation and amortization in the second quarter of fiscal 2014 was $583,000 compared to $683,000 in the second quarter a year ago. We recorded zero income tax expense or benefit in the second quarter of fiscal 2014 due to the effect of book tax differences and valuation allowances on net operating losses in certain tax jurisdictions which the company operates. This compares to a tax benefit of $800,000 in the second quarter of fiscal 2013.

The net loss for the second quarter of fiscal 2014 was $3.8 million or $0.39 per share compared to a net loss for the second quarter of fiscal 2013 of $2.1 million or $0.22 per share. Total revenue by geographic region for the fiscal second quarter was North America region at 16%, Asia Pacific region at 60% and Europe at 24%. Our financial position remains strong at March 31 with essentially no debt and total unrestricted cash and cash equivalents of $36.7 million compared to $30.3 million at December 31, 2013.

The increase in cash and cash equivalents is due primarily to the receipt of a tax refund of $5.5 million and the proceeds of $1.1 million from exercised stock options. At March 31, 2014, we had working capital of approximately $40.4 million.

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

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen we will now begin the question-and-answer session. (Operator Instructions). The first question will come from Mark Miller of Noble Financial Capital Markets. Please go ahead.

Mark Miller - Noble Financial Capital Markets

Congratulations on your orders.

Bradley C. Anderson

Thank you.

Mark Miller - Noble Financial Capital Markets

I’m just wondering, about the Ion Implant you are going through development efforts and if all goes well, can you give us a ball park estimate when it might be revenue?

Jong S. Whang

Well, that's a difficult one and first we have to get some orders. But the development now is starting at ECN to further work on the N- type technology and but the order from ECN of course is a revenue that's already, not in this quarter but will be in next question right, Brad?

Bradley C. Anderson

Yeah, I think in the next couple of quarters they will recognize that revenue, just depending on when we get the machine installed and up and running and meeting their spects which are anticipated but sometimes there is facility issues and everything else. So it just takes time for that. But expectations are that's not -- that will happen it's just timing is probably the next month, next quarter or two.

Mark Miller - Noble Financial Capital Markets

In terms of your sales could you break out solar and semi sales, I don't see that in the announcement?

Bradley C. Anderson

Yeah, we did not break that out. We broke our orders in the announcement. We didn't break out for sales.

Mark Miller - Noble Financial Capital Markets

Okay, you had a large tax benefit the previous quarter and I guess taxes were basically nil in the March quarter. But can you give us any feeling for what the tax is -- are you going be close to zero over the next couple of quarters?

Bradley C. Anderson

Yeah, that's always a little bit difficult because we operate in several different tax jurisdictions. And in several of those we have had for financial reporting purposes cumulative loses and therefore while we have -- we do expect to utilize those tax operating losses or NOLs as people refer to them as for accounting purposes we have to reserve for those benefits until the profits return. And when you get close to the numbers we are at and have been in the quarters the permanent -- the tax differences can have a kind of ricochet on your effective tax rate so there is -- it's difficult to predict right now as far the P&L impact related to taxes.

Mark Miller - Noble Financial Capital Markets

Just one final question, I'll jump back in the queue. The lower margins this quarter, that was more driven by the lower recognition of previous deferred profits or was that a mix type factor?

Bradley C. Anderson

As it relates in comparison to a year ago quarter, yes, because we did recognize, you saw that we had what, 8 million plus in revenues a year ago quarter and yet had a 30% margin. That was because there were some recognition of previously deferred revenue higher than what we would have in this quarter.

Sequentially a lot of that has to do with volume. While the revenues are down we did have much higher shipments in the quarter, the December quarter.

Mark Miller - Noble Financial Capital Markets

Thank you.

Operator

(Operator Instructions). And the last question will come from Gordon Johnson from Axiom Capital Management. Please go ahead with your question.

James A. Bardowski - Axiom Capital Management

Hi, guys. This is James Bardowski in for Gordon

Jong S. Whang

Hello.

James A. Bardowski - Axiom Capital Management

Only a few questions. I guess as far as I know it's been a little bit of time since you guys gradually broke out the operating EBITDA margins. But would you mind just giving us a sense of where your EBITDA margin stands per segment? Is it right to think that polishing would be maybe 7%-7.5%, a little clarification if you don't mind?

Bradley C. Anderson

Yeah, we don't get that granular as far as breaking down margins on each of our businesses. I mean there are some segment-related requirements that we have to put in 10-Q but we don’t -- in 10-K but we don't normally break that out.

James A. Bardowski - Axiom Capital Management

And I know I did hear a question before regarding the revenue between the segments. I know you mentioned that, that you didn't break it out. Does that mean that you are not going to? Or what's the sense from that?

Bradley C. Anderson

We just didn't break it out in the disclosure, in the press release.

James A. Bardowski - Axiom Capital Management

Okay, and then I guess just two more quick ones. The lower gross margin, do you expect that to revert back-up. What can we expect as far as run rate for gross margin as well as OpEx, if you would?

Bradley C. Anderson

Yeah, sure. Just in general, obviously we have not given guidance as it relates to quarterly numbers. We have given some general indications of what we see with the market. I think that everyone should remember that while there is -- we are optimistic about the future as we start to see more of an equilibrium between demand and supply we are in the transition period right now. So while there are selected opportunities and we fully participate in those opportunities, and I think that's evidenced by what you have seen from our bookings this past quarter and what we announced today. There's still a transition period and there will be from time-to-time lumpiness and then from that standpoint that has an effect on what happens with margins on a quarter-to-quarter basis. But generally we see again optimistic that this second half of 2014 we'll see improved demand and then from there improving more in 2015.

James A. Bardowski - Axiom Capital Management

And for the improvement on the margins, are you seeing any kind of specific benefit from -- I don't know if you mentioned that yet about the 60% out of the Asia-Pac region? Do you see added benefit from operating more there as opposed to North America, EU et cetera?

Bradley C. Anderson

Well, historically a lot of our revenue has come from the Asia Pacific region. It does differ from quarter-to-quarter because we, depending on the concentration whether it's more solar or more semi, and for example the equipment that we shipped to San Antonio heavily affected where our revenues came from last quarter.

In general the cost structure we have taken significant adjustments to and feel like we are in a position to do I think a very good job at balancing that demand prospects that we see with the investment that we feel is needed to fully participate in the future opportunities, both capacity expansion and from a technology stand point.

As evidenced by the progress we have made with our ion implant and with our new PECVD tool, and the recent orders we have received.

James A. Bardowski - Axiom Capital Management

Okay, alright. Great. I guess one final one. Looking at some multiples on your business, just trying to get a good sense on whether you agree or not with them some multiples to each of the segments, do you think it's appropriate to put about a five, six times multiple on semi-solar polishing rather. What your thoughts on that?

Bradley C. Anderson

You know that’s we are focused on operating the business, each of our businesses in I think most prudent way and getting our in position to take advantage of opportunities in those markets that we serve whether it's solar, semi-conductor or LED. I think we have done a good job of managing during the downturn and looking forward really our investment bankers are looking at putting multiples on the businesses, I think we are really more focused on driving and participating in these opportunities and managing our business to a cost structure that make sense for the future.

James A. Bardowski - Axiom Capital Management

Understood, thanks a lot guys and great job on the orders and performance on semi side.

Bradley C. Anderson

Thank you.

Operator

And ladies and gentlemen, that will conclude our question-and-answer session. I would like to turn the conference call back over to Brad Anderson for his closing remarks.

Bradley C. Anderson

Thank you for your time today and for your interest in Amtech. This will conclude today's call. Thank you.

Operator

Thank you. Ladies and gentlemen, the conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your lines.

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