Asyst Technologies, Inc. Q4 2008 Earnings Call Transcript

Asyst Technologies, Inc. (ASYT)

Q4 2008 Earnings Call Transcript

May 6, 2008 5:00 pm ET

Executives

John Swenson – VP of IR and Corporate Treasurer

Mike Sicuro – SVP and CFO

Steve Schwartz – Chairman, President and CEO

Analysts

Hari Chandra – Deutsche Bank

Brian Lee – Citigroup

Jinhy Yoon – JPMorgan

Mike Nery – Nery Asset Management

Presentation

Operator

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Asyst Technologies fourth quarter 2008 fiscal year conference call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator instructions) This conference is being recorded today, May 6, 2008.

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

John Swenson

Thanks very much. Good afternoon everyone and welcome to this fiscal 2008 fourth quarter conference call for Asyst Technologies. A press release detailing our results for the quarter was distributed by Business Wire earlier today. The release will be posted to our website at www.asyst.com. To access the release, 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. Mike Sicuro, 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 Mike Sicuro. Mike?

Mike Sicuro

Thanks, John, and good afternoon everyone. We have several important items to discuss relative to the fiscal fourth quarter, including a number of non-cash and one time items that entered the P&L at your end as well as strong bookings. As usual, we'll start with bookings and then move to the P&L and balance sheet.

Consistent with our discussion on the last call, bookings improved significantly in the fiscal fourth quarter. Bookings for the quarter were $137 million, up from $83 million in Q3. In AMHS, bookings totaled $108 million, up from $45 million in the prior quarter. We had one significant semiconductor AMHS order in the quarter related to Phase III of a large flash fab in Japan. This compares with no major large projects booked in fiscal Q3. Although we again saw solid bookings from our largest logic customer the activity level elsewhere in our semiconductor base remains low.

In contrast, bookings for flat panel display increased significantly in the March quarter. Approximately $30 million of our $48 million of FPD bookings relate to a large new Gen 8 fab in Korea. The remainder relates to upgrade and expansion of customers’ existing Gen 5 and Gen 6 tabs, primarily in Korea.

Bookings of tool and fab automation products totaled $29 million, down from $38 million in Q3. This 23% decline is consistent with the bookings and shipment trends among our OEM customers.

The mix of new orders was as follows. Semiconductor 56%, flat panel 36%, and service was 8%. OEMs represented 13% of new orders and the remainder, or 87%, came from end users.

By geography , new order distribution was follows. North America 12%, Japan 43% Taiwan 5%, other Asia Pacific, including Korea, was 37%, and Europe was 3%. Backlog as of the end of the quarter was $122 million.

Consolidated net sales for the fiscal third quarter were $94.3 million, down from the $106.5 million in the prior sequential quarter. This was in line with our guidance. Net sales related to AMHS were $62 million, down from $68.4 million in the prior sequential quarter. Net sales of tool and fab automation solutions were $32.3 million, which compares with $38 million in Q3, a decline of 15%.

Sales mix was as follows. Semiconductor 79%, flat panel was 12%, and service was 9%. OEM represented 21% of sales for the quarter.

By geography, sales distribution was as follows. North America was 17%, Japan was 45%, Taiwan was 18%, other Asia-Pacific 17%, and Europe was 3%.

Consolidated gross margin for the quarter was 29%, down from 31% in Q3. AMHS gross margin was 22%, down from 24% last quarter primarily because of lower volume. We continue to take cost out of our AMHS products and are on track with our outsourcing and supply chain programs. Gross margin on tool and fab automation solutions remain constant at 43%, despite the decline in volume. This is what we have come to expect from our outsourced manufacturing model.

Now, let's move on to operating expenses. Consolidated R&D expense was $11.9 million, up from $10.5 in Q3. This is higher than originally forecast, but it relates to specific opportunities around new products.

SG&A expense was $27.5 million, up from $21 million in the third quarter. Included in SG&A was a non-cash reserve of $3.4 million related to supplier payments on a previously disclosed cancelled Gen 5.5 flat panel project. In Q4, we also saw a number of other expenses that will not carry into Q1.

In the quarter, we took actions that we expect will yield $8 million to $10 million in annualized cost savings primarily SG&A, and we recorded a related restructuring charge of $1 million. We expect to record an additional charge of a similar magnitude in the current quarter. As a result of our cost reductions, we expect SG&A for our June quarter will be less than $21 million. We expect to maintain spending at this level or slightly lower for the remainder of the fiscal year.

Interest and other income was $2.7 million, up from $0.4 million in the prior quarter. The increase is attributable to increased foreign exchange gains as the dollar weakened against the yen in Q4. We expect ongoing interest and other expense to be approximately $2.5 million per quarter.

On a non-GAAP basis, we reported a net loss of $10.3 million, or $0.21 per share. Included in the net loss is approximately $0.08 per share of non-cash adjustments related to the tax provision. $0.05 of this is attributable to increased reserves related to our long term tax strategies, particularly in Japan and $0.03 related to other year end true-ups. This result compares with non-GAAP net income of $1 million, or $0.02 a share in Q3.

On a GAAP basis, we reported a net loss of $12.9 million, or $0.26 a share.

Now, let's turn to the balance sheet. We ended the quarter with $96 million of cash, up from $78 million at the end of December. Total debt as of the end of the quarter was $156 million, up from $135 million at the end of the prior quarter. Approximately $7 million of the increase in cash and $16 million of the increase in debt is attributable to currency translation adjustments to the balance sheet. Excluding translation impact, net cash increased by approximately $5 million for the quarter.

Now to our outlook for the fiscal first quarter ending June. We expect our operating results for the fiscal first quarter will be very similar to the results in Q4. Although we did see a solid increase in AMHS bookings in Q4, we do not expect to achieve the same bookings level in June, and as a result we anticipate that AMHS revenue will be essentially flat in the range of $55 million to $65 million. We expect tool and fab automation sales will soften to approximately $30 million. We expect reported non-GAAP loss of $0.11 to $0.17 per share, and a GAAP loss of $0.16 to $0.22 per share.

With that I'll turn it over to Steve.

Steve Schwartz

Thank you, Mike. My comments today will focus on the near term and medium-term outlook as well as an update to our many new product initiatives. Consistent with our commentary on the last conference call in late January, we saw significant improvements in AMHS bookings during the March quarter.

The biggest driver was the large Gen 8 FPD project for a major Korean customer. In the 2003 to 2004 time frame we automated this customer’s Gen5 and Gen 6 fabs, which continue to utilize our market-leading Automated Guided Vehicle technology to transport large cassettes of glass around the factories. During that time frame we also automated a large Gen6 fab in Taiwan using the same technology.

In 2004, we generated more than $160 million of revenue in flat panel and had greater than 20% market share. In the years since the industry went through a significant downturn, and when our Korean customer and others moved to build Gen 7 fabs our vehicle technology did not scale to the larger panel size and significantly greater weight. As a result, we missed some opportunities at Gen 7, which was the only glass size that saw significant investment over that period.

Rather than playing catch up with Gen 7, we focused our efforts on development of a Gen 8 solution and on winning this Gen 8 project with this key customer. We believe that this project alone will represent $60 million to $70 million of AMHS revenue over the next 18 to 24 months. In March, the same customer also booked more than $15 million with us to upgrade and expand the AMHS capability in its Gen 5 and Gen 6 fabs. This will likely be recognized in sales over the next two to three quarters.

In near term, we see additional flat panel opportunities related to new fabs going into Taiwan and China. It turns out that there are even opportunities for large Gen 8 vehicles in some applications in certain fabs. This would allow us to leverage our market-leading AGV capability which we have already developed and tested for Gen 8 applications.

We have a small lean team engaged in product and business development for flat panel. As a result, we are able to be both selective and nimble, engaging only in those opportunities where we have the chance to compete on capability rather than price, and to focus on the customers that we believe will continue to be spenders over the next several years.

Overall, we believe we are well positioned to build a flat panel business of $100 million annually for Asyst with a contributed profit in the range of 15% to 20%. We believe this provides diversification beyond semiconductor equipment, which is particularly valuable in times like these when semiconductor equipment is down, but the flat panel players are investing.

During the quarter, we also saw an increase in bookings for semiconductor AMHS, but the increase is related to the timing of customer orders and not to a fundamental turn in the industry. Despite a gain in market share over the past year, our average bookings in semiconductor AMHS have been running approximately 30% below mid-cycle levels. We see this pattern continuing into the June quarter. As we look into late summer and the back half of our fiscal year, the outlook for semiconductor AMHS bookings is stronger. As a result, the outlook for AMHS revenue also gets better through this fiscal year, but with a clear weighting to the second half.

In a new fab or expansion we know that AMHS typically must book, ship, and install before tools can be installed. We, therefore, believe it's likely that the equipment industry in general is six to nine months away from a recovery in shipments. Our tool and fab automation solutions, including our OEM products are highly correlated to the general trend in tool shipments, which means the recovery in that business is likely on the same six to nine months schedule.

Our longer-term outlook is very positive. We are currently investing in new product development at a record pace. This includes true next generation products. These are products that we believe can help to change the nature of our relationship with customers as we move from selling hardware, to meet capacity requirements, to providing solutions to productivity problems.

Some of these products, such as our conveyor already are penetrating the marketplace. We recently achieved three more wins for our conveyor and now have it deployed in a dozen different applications across five different fabs. This is the only market proven, production worthy, revenue generating conveyor that can boast an installed base of any consequence.

We also now have two wins for our new VAO software, which allows chip manufacturers to visualize, analyze, and optimize performance down to the tool level in real time. In addition, we currently are preparing to ship the customers a next generation proprietary automated material handling capability that blurs the line between AMHS and the tool front-end. This automation solution is designed to address the emerging productivity challenges created by larger fabs running complex manufacturing processes with tools that cannot be efficiently utilized through conventional automation capabilities. As a group, these new products are differentiated from anything in production today and as such we believe they can deliver higher gross margin to us as they deliver greater value to our customers.

We also are investing in products to support our current business by delivering improved performance, lower cost, and a bridge to our next generation technologies. This includes a new load port we call the Falcon, which for the first time in many years is giving us opportunities to gain market share in Tier 1 OEM accounts. The Falcon represents a complete re-engineering of our highly successful Iso-Port load port. It's designed to be a clean, high performance, reliable tool at a lower price point with the same or greater gross profit. We shipped the first Falcon to a new Tier 1 OEM prospect at the end of April, and this week we expect to ship Falcon to another new Tier 1 OEM. These opportunities are occurring because we have a good product at the right price at a time when our competitors have not had a substantial new offering in years.

We also are migrating Falcon technology to our Spartan EFEM, which continues to accumulate design wins and market momentum among Tier 2 and Tier 3 OEMs. We believe this will further position the Spartan as a strong EFEM platform for the Tier 1 OEM market.

The OEM market continues to be extremely important to Asyst. It's a large and established segment that represents more than one-third of our total market opportunity. Also as we move forward with our total fab automation strategy it's important that tool manufacturers have qualified and depend on our tool front-end products.

This Thursday morning, May 8th, we'll be holding an analyst day here at Asyst. This will be the first opportunity for anyone outside of customers, suppliers, and employees to witness our new product capabilities. We believe that you'll be seeing all of these products in fabs over the coming year.

In conclusion, we believe we are better positioned than at any point over the past five years. We have a leadership position among the industry's largest and most technically sophisticated customers. We are again in the flat panel business, which gives us the opportunity to maintain something at or near EBITDA breakeven during the current semiconductor equipment downturn.

We are funding R&D at record levels and more importantly have new products that will be deployed and generating sales in the current fiscal year. We have a highly efficient manufacturing and supply chain model, which is now being implemented across our entire business, and which we believe will contribute to incremental margin improvement in the current fiscal year.

And finally, we have a strong global team that is staying close to customers and focused on products, which we believe will lead to strong financial performance when the cycle turns.

With that I'll ask the operator to come back on so we can take your questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Hari Chandra from Deutsche Bank. Please go ahead.

Hari Chandra – Deutsche Bank

Thank you. I just have a couple of questions regarding the acquisition offer that was there up until this morning. What was wrong with the offer given that it was priced at $5 to $6 and the market is valuing the stock 32% below that as of the close today?

Steve Schwartz

Hi, Hari, this is Steve. Hari, that's old news for us. We were very thorough when the offer came in some months ago. We evaluated it with the Board, with financial advisors, and we deemed it to be significantly below the value that the–- the inherent value that the company has and the strategy that we are pursuing. So we think that even the numbers that were put forth were far below what we deem to be a reasonable offer for the company.

Hari Chandra – Deutsche Bank

Okay. If $5 or $6 is not the right price, can you give us an indication of where do you think the fair value is based on your perception?

Steve Schwartz

Hari, we are not going to quote any numbers right now, but we do have a pretty significant strategic plan with valuation considerably higher than that.

Hari Chandra – Deutsche Bank

Okay. And a follow up question. The FPD industry ramp, given the size of the – can you give us the size of the FPD images market? And also what share do you have in it currently?

Steve Schwartz

Yes. Hari, we anticipate that over the coming year the AMHS opportunity will probably be close to $500 million. And just to give you an idea, in the previous fiscal year ended the end of March, we took orders for about $48 million all in for the year.

Hari Chandra – Deutsche Bank

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Timothy Arcuri from Citigroup. Please go ahead.

Brian Lee – Citigroup

Hi guys. This is actually Brian Lee calling in for Tim. A lot of numbers here. Mike, trying to get my arms around them still, but outside of the restructuring charges here, what are the one-time charges in Q4 that won't be recurring in Q1?

Mike Sicuro

Yes, that's fair, Brian. Number one is we took about $3.5 million charge related to some costs on a supplier that we had with respect to a cancelled 5.5 project that we de-booked last Q1. So, that’s $3.5 million. We also took some reserves and had some one time true-ups to the tax line related to – which was about $0.08 in total in total. And then third is we had some FX gains that were going through the P&L that probably came out to be about $0.06, maybe $0.07 depending on which way you run the taxes. And then on top of that you mentioned the restructuring charge about $1 million of which we'll still have – about that amount in Q1.

Brian Lee – Citigroup

Okay. So the $3.5 million charge that was in SG&A. You have another kind of $0.08 per share charge against the tax line?

Mike Sicuro

Yes, through the tax line, correct.

Brian Lee – Citigroup

Okay. And then a $0.06 actual benefit on the other income line?

Mike Sicuro

Yes. Exactly. You got it.

Brian Lee – Citigroup

Okay. And then I think you made a comment going forward the other income line we should be modeling an ongoing $2.5 million per quarter. Is that a loss or is that a gain?

Mike Sicuro

Yes. That’s net interest expense, which would be net of whatever interest income we get off the balance sheet from cash, net against our debt service.

Brian Lee – Citigroup

Okay. Thanks a lot.

Mike Sicuro

Thank you.

Operator

Thank you. Our next question comes from the line of Jinhy Yoon from JPMorgan. Please go ahead.

Jinhy Yoon – JPMorgan

Hi, what was flat panel AMHS revenue and gross margin this quarter? And where do you see that going next quarter?

Steve Schwartz

Hang on, Jinhy. One second.

Mike Sicuro

Yes. So, Jinhy, flat panel revenue in the quarter, $11 million.

Jinhy Yoon – JPMorgan

Okay.

Steve Schwartz

And gross margin was above the corporate average.

Jinhy Yoon – JPMorgan

Above the corporate average, okay. And then where do you see that going next quarter? I assume that's up.

Mike Sicuro

This is Mike. Next quarter, we will see the revenues probably uptick somewhat as we continue to deliver on the Gen 8 project in Korea. Gross margins will probably still be above the corporate average or close to the corporate average.

Jinhy Yoon – JPMorgan

Right. Yes, I was wondering about that. The Gen 8 project, is that – considering it’s kind of like a newer project, is that going to have some lower gross margins? Is that going to affect that in any way?

Steve Schwartz

Yes, Jinhy, the gross margins on the Gen 8 are pretty consistent with where the AMHS is right now in the aggregate.

Jinhy Yoon – JPMorgan

Okay.

Steve Schwartz

The Gen 5 and 6 is higher.

Jinhy Yoon – JPMorgan

Okay. Got you. Then I think your guidance next quarter implies like a hit to gross margin something like to the mid-20s. Am I interpreting that correctly?

Mike Sicuro

No – it’s Mike – no, that is not correct. We are looking at gross margins to be somewhat flat to possibly up a little bit, but more likely flat quarter-over-quarter.

Jinhy Yoon – JPMorgan

Okay.

Mike Sicuro

And it models out pretty mathematically when you go down to the front end to the back end of the ranges.

Jinhy Yoon – JPMorgan

Alright. Got you. That's it from me. Thanks.

Mike Sicuro

Thank you.

Operator

(Operator instructions) Our next question comes from the line of Mike Nery from Nery Asset Management.

Mike Nery – Nery Asset Management

I had a couple of questions. SG&A, even if you exclude the $3.5 million, was up year-over-year. Bookings really fell off in the first quarter of this year. Why did it take so long? Why are we only now making cuts to SG&A expenses?

Mike Sicuro

Yes, Mike. A couple of things. One is when you back out the full amount of the cost related to the supplier in Korea, it was actually about $5.5 million. We took about $2 million earlier in the year. So SG&A expense is down about $1 million or $2 million year-on-year, ’07 to ‘08. I think number two is we were – we looked at the level of bookings coming through this quarter, and it made some, I’ll call it some very good decisions toward the end of the year to start taking those costs out. At this point in time, we believe it was the right time in the cycle to be doing that getting our SG&A down to we'll call it 21 or lower going forward.

Mike Nery – Nery Asset Management

Okay. So, that $5 million won't be there next year. So $21 million per quarter is $84 million and this year it was $94 million. So really $89 million excluding that $5 million. So you are talking about a cut of about $5 million and–

Mike Sicuro

Yes, somewhere – I think it’s going to be higher than that, frankly, because I mean again in Q1, and as I am sure you know as well or better than I do or we do, that further out in the year you go the more ability you have to reduce the cost relative to that current fiscal year. So we see the decline in SG&A to sort of dribble down over the course of the year. Q1 will be $21 million or lower. Q2, we hope to see lower than that. And Q3 we'll probably hit our stride in Q3 as it relates to, I'll call it a normalized new run rate for SG&A as we start getting the benefit of the cost reduction activities we are currently ongoing today.

Mike Nery – Nery Asset Management

Okay. And that sounds good. I want to make sure, in the fourth quarter of last year, you said that SG&A this year was going to be down $5 million to $8 million. You reiterated that in the first quarter of this year. And even excluding this $5 million we are really only down $1 to $2 million.

Mike Sicuro

Yes. No, I think that's fair. That's true. I think that at the end of the day during the year we started to see the beginning of the year a little more growth on the business side. The other side of the coin too is about half of our costs, okay, throughout the entire organization are yen based and as the yen got strong this year, we saw basically translation adjustments going through the P&L related to FX on the yen against the dollar. So there's probably somewhere in the neighborhood of maybe 15% over all in terms of on our yen-based expenses that showed an increase to the year. So that's probably somewhere in the neighborhood of $3 million or $4 million overall year-on-year.

Mike Nery – Nery Asset Management

Okay. And can you give me the CapEx for the year we just ended and what you are looking at for next year?

Mike Sicuro

Yes, fair question. We did about $8 to $9 million, maybe $9 million this year. We are looking at about the same amount of level next year. Again, as you know, our business model doesn't require a ton of CapEx, just enough to invest for customers on product demos, et cetera, et cetera, for new product development.

Mike Nery – Nery Asset Management

Okay. And did you give the R&D outlook for next year?

Mike Sicuro

Not for the following year but I think over the course of the next couple of quarters I think we did roughly around $11.5 million $12 million of R&D expense. Probably see that bounce around plus or minus that number et cetera, et cetera, and it might go up a little bit later in the year, but it really all depends how well we do with our R&D development activities over the last six to 12 months. One other follow-up question as well on your SG&A – or a comment on your SG&A point, just recently here which was reflected in the charges and will be reflected in the current charges in the quarter, we took out about 100 headcount, or I should say a 100 FTE equivalents, slightly actually above that here just recently in the last four to six weeks.

Mike Nery – Nery Asset Management

Okay. And so R&D, if we stick around this level, that means for the year it’s going to be up on the order of $8 million.

Mike Sicuro

That's about right. Yes, it should be north of $40 million, $45 million-ish maybe a little bit higher, maybe a little bit lower. It all depends on again what our traction level is with our new product development.

Mike Nery – Nery Asset Management

Okay. So the cost saves on our G&A are going to be funded in the R&D.

Mike Sicuro

Absolutely. That is the plan. Better use of capital I think long term for top-line growth.

Mike Nery – Nery Asset Management

Okay. So we really need to pick up in revenues in the back half in order to get to EBITDA breakeven is what–?

Mike Sicuro

We are right now operating right at our EBITDA breakeven, even as you saw 29%, 30% gross margin range, which we acknowledge has a lot of uplift and operating room for improvement. I think the higher that gross margin gets, and we expect it to get better as the year marches on, that just lowers our breakeven down below the 90-ish million and into the 85 to 88 range, which is where we expect to operate on an ongoing normalized basis.

Mike Nery – Nery Asset Management

Okay. Thank you.

Mike Sicuro

Thank you. Good questions.

Operator

(Operator instructions) And at this time I show no questions in the queue. I'd like to turn it back to management.

Steve Schwartz

Okay. Thank you everyone. We look forward to another chance to speak with you on Thursday and at our earnings call next quarter. Thank you.

Operator

Ladies and gentlemen, this concludes the Asyst Technologies fourth quarter 2008 fiscal year conference call. If you would like to listen to a replay of today's conference, please dial 800-405-2236 or 303-590-3000 with an access number of 11113427#. ACT would like to thank you for your participation. You may now disconnect.

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