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Amtech Systems, Inc. (NASDAQ:ASYS)

F3Q08 Earnings Call

August 13, 2008 5:00 pm ET

Executives

Jim Byers - Investor Relations, MKR Group

Jong S. Whang - President, Chief Executive Officer and Director

Bradley C. Anderson - Chief Financial Officer, Vice President - Finance, Treasurer, Secretary

Analysts

Colin Rush - Broadpoint Capital

Ramesh Misra - Collins Stuart

Manoj Nadkarni - Chip Investor Group

Tom Schwartz - Collins Stuart

Operator

Welcome to the Amtech fiscal 2008 third quarter conference call. (Operator Instructions) I would now like to turn the conference over to Jim Byers at MKR Group.

Jim Byers

Thank you for joining us this afternoon for Amtech System’s third quarter conference call. On the call today are J.S. Whang, Amtech’s President and Chief Executive Officer, and Brad Anderson, Amtech’s Chief Financial Officer.

After the close of market trading today, Amtech released its fiscal 2008 third quarter financial results. The release will be posted on their website at www.amtechsystems.com. In addition, a phone replay of today’s call will be available beginning approximately two hours after the call’s conclusion and remaining in effect for one week. The call replay information is included in the earnings press release.

Before we begin, let me note that during today’s call management will make forward-looking statements. All such forward-looking statements are based on information available to Amtech as of this date and they 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 Amtech’s customers, change and volatility in the demand for diffusion equipment, the effect of changing worldwide political and economic conditions on government-funded solar initiatives, capital expenditures, production levels, including those in Europe and Asia, the effect of overall market conditions and market acceptance risks. Other risks include those associated with dependence on suppliers, the impact of competitive products and pricing, technological and product development risks, and other risk factors detailed in the company’s Securities and Exchange Commission filings including its forms 10-K and 10-Q.

With that said, I will now turn the call over to J. S. Whang.

Jong S. Whang

I will review our financial results in a moment, but first, I will provide some highlights of our Q3 and an update on region business development. We saw strong growth in solar shipments in Q3 driven by increasing customer demand while our solar bookings were lighter in Q3. We continue to see good demand and we are optimistic about continued strength in our total bookings pipeline. Overall including semi orders, we produced over $20 million in total orders in Q3 and have a healthy backlog to fuel Q4 and into fiscal 2009.

For the fiscal year to date, total order bookings including semi have reached nearly $90 million and we are well on our way to surpassing $100 million in total order bookings by the end of our fiscal 2008, the end of our next month, September. Our Q3 results also reflect significantly improved operational productivity helping us to leverage higher volumes to achieve strong operating results and our substantial progress reflects the increasing benefit we are seeing from investment in our infrastructure for our solar growth plan and streamline and optimize our operations.

As our results demonstrate, we are making good progress toward achieving our targeted operating models. We also remain focused on expanding our product offering. During the quarter we introduced our new solar PECVD product which performs coating of antireflective film on the solar wafers, a very important step in the manufacturing of a solar [inaudible]. Following the announcement on June 10, we have been diligently promoting our PECVD product to marketplace and have seen interest from potential customers.

On the semi front, while revenues are down year to date, we are pleased with the recent order activity and healthy book to bill ratio. There continues to be uncertainty with the semiconductor industry and we remain cautious of our future order activity.

To conclude, our performance in Q3 reflects good progress in strengthening our capability to achieve significant operational leverage and it truly demonstrates our successful transition from being a semi-dominant company to a solar-dominant company.

Now for Brad Anderson, our CFO.

Bradley C. Anderson

Net revenue for the third quarter was $24.1 million, representing an 88% increase over the third quarter last year and a 37% sequential increase, reflecting higher solar shipments driven by continuing demand for our solar products. Solar revenue for the third quarter was $16.6 million compared to $3.9 million in solar revenue in Q3 last year. Year to date solar revenue totaled $33.2 million compared to $8.1 million for the same period last year.

Total order backlog as of June 30, 2008 was approximately $60 million, up 191% for backlog of $20.7 million in the third quarter a year ago and down slightly from the end of last quarter. This total includes approximately $44 million in orders from our solar industry customers at quarter end compared to $11.5 million of solar backlog in Q3 last year. Backlog includes deferred revenue and customer orders that are expected to ship within the next 6 to 12 months.

Third quarter gross margin was 29%, an increase of 200 basis points from 27% in the third quarter of fiscal 2007 and up 650 basis points from 23.5% in the preceding quarter. The improvement is primarily due to higher shipment volume and related efficiencies and economies of scale offset by higher warranty costs and higher deferred profit in the quarter.

During the quarter we deferred $1.8 million of profit compared to $700,000 in the prior year quarter and the same amount in the preceding quarter. Selling, general, and administrative expenses were $4.8 million in the third quarter of fiscal 2008 compared to $4 million in the preceding quarter and $2.7 million in the third quarter of 2007. As a percentage of revenues, SG&A was down 240 basis points sequentially, down from 22.5% in the March quarter to 20.1% in the June quarter. SG&A expenses were higher compared to the prior year quarter resulting from $1.1 million in increased selling costs primarily commissioned as well as SG&A expense at R2D which was acquired in the first quarter of fiscal 2008, increased costs related to stock based compensation, increased depreciation and operating costs for the company’s new building in the Netherlands, and increased personnel and consulting costs.

As announced previously, we recorded a restructuring costs of $344,000 in the third quarter, reflecting a reorganization of our Bruce Technology Semiconductor Division to optimize operations in light of lower plant utilization resulting from a slowdown in the semiconductor industry.

Income taxes for the June quarter were recorded at an effective rate of almost 40% which includes an adjustment to true up the tax accrual to the tax return for fiscal 2007. This adjustment added approximately 2 to 3 percentage points to our effective tax rate in the third quarter. Looking forward, we are pursuing strategies to reduce our consolidated tax burden and we are hopeful that such strategies will be in place to benefit us starting next fiscal year.

Online, our net income for the third quarter of fiscal 2008 was $1.2 million or $0.13 per diluted share compared to net income of $1 million or $0.15 per diluted share for the third quarter of fiscal 2007.

Turning to the balance sheet, as of June 30, 2008, we had a cash balance of $36.8 million and working capital of $58.7 million, up slightly from the end of March 2008. During the quarter we were able to finance much of the growth in receivables and inventory with customer deposits and trade payables, limiting the reduction in our cash balances.

Now turning to the outlook for the remainder of our fiscal 2008. Looking into the fourth quarter of this fiscal year, we anticipate revenues to be in the range of $22 million to $24 million, representing growth of approximately 68% to 83% over the fiscal 2007 fourth quarter. Our operating margin as a percentage of revenue is expected to be slightly lower in the fourth quarter compared to the third quarter of fiscal 2008, excluding the effects of the restructuring charge, due to a heavier product mix of specialty furnace systems, RND type furnaces that require higher material labor costs and due to higher commission.

For fiscal 2008, we anticipate revenue to be in the range of $75 million to $77 million, representing growth of 63% to 67% over fiscal 2007. Operating results for the fourth quarter as in every quarter for Amtech could be impacted by the timing of systems shipments. The net impact of revenue deferral on those shipments, the recognition of revenue based on customer acceptances, all of which can have a significant effect on operating results.

To summarize, our third quarter results demonstrate the progress we are making to improve operational performance, our strong order backlog will continue to fuel our growth in the fourth quarter and into fiscal 2009 and we are optimistic about our order pipeline despite the recent slowdown in order booking. We continue to be active with our efforts to add additional front end solar manufacturing steps to our product portfolio to more fully participate in the rapidly growing solar market.

This concludes the prepared remarks section of our conference call. We will open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Colin Rush with Broadpoint Capital.

Colin Rush - Broadpoint Capital

Can you give us an update on the monthly run rate for the collection of diffusion furnaces?

Jong S. Whang

I think we are about 7 and trying to push up to 8. That’s where we are.

Colin Rush - Broadpoint Capital

And how many tools did you ship in the quarter?

Bradley C. Anderson

We don’t typically give out that granular level of detail on a quarterly basis.

Colin Rush - Broadpoint Capital

On the PECVD indications, can you give us a little bit about how to think about how that pipeline is shaping up and when we might expect to start to see orders?

Jong S. Whang

As we introduced this one just about two months ago or so and like I said earlier, we are diligently promoting this product in the marketplace and we’re seeing some good interest from potential customers and so as to the pipeline looks like and while our hope is it’s still high, it would be premature to quantify that.

Colin Rush - Broadpoint Capital

How should we think about the impact of Euro on your cost structure going forward as we speak? [inaudible] Euro appreciation and depreciation [inaudible].

Bradley C. Anderson

It hasn’t affected us really too much in our orders to date and the pipeline the way it looks. Just recently we’ve seen a little bit of a correction, a few days, but overall it has not been a significant affect from the sales and marketing standpoint.

Colin Rush - Broadpoint Capital

Are you starting to get any better pricing on the diffusion furnaces at all? Have you seen pricing going up or down at this point?

Jong S. Whang

I think it’s rather consistent and the prevailing market price seems to be in line with our pricing structure.

Colin Rush - Broadpoint Capital

With the kind of rebound with the semi business this quarter, how should we start thinking about that going forward? Is the $7.5 million a quarter run rate is going to be consistent, do you expect that to be up or down quarter-over-quarter in the fourth quarter?

Jong S. Whang

As we said previously, we are struggling to pin down where the trend line is for the semi recovery and so I think always as we have been and we will check closely what industry performances are. The quarter to quarter, there might be some uptick on our bookings and which happened in this quarter but we really cannot say that trend will continue through Q4 or next year yet.

Colin Rush - Broadpoint Capital

One final question. Can you talk a little about the surface pasteurization and with your diffusion process. Any incremental improvement that you’re seeing with the tools or hearing about from your customers, and were there seeing consistencies and does [Adobe] come out with their cells?

Jong S. Whang

All we know is whichever customers and they use our customer. They seem to be very satisfied with our opponent’s performance and reflects on we getting the repeat orders from many of our customers and beyond that how much we’re really improving what effects on a solar cell, we are happy with the customers general expression of the positive performance coming from our furnace. That’s about as much as we can say.

Operator

Your next question comes from Ramesh Misra from Collins Stuart

.

Ramesh Misra - Collins Stuart

First of all, in regards to your deferred revenue, that went up [inaudible] about $2.4 million quarter-over-quarter. Can you give me a sense of what’s going on over there. I know it tends to vacillate quarter-over-quarter but is it something deeper than that going on?

Bradley C. Anderson

No, I think what’s really happening there is because of the wrap up in shipment and revenues quarter-over-quarter you’re seeing a continued wrap up in the net deferred profit increase quarter-over-quarter. As you continue to increase revenues, you typically are not going to have more acceptances than you are going to have of new deferrals. That is the case.

Ramesh Misra - Collins Stuart

In regards to your semiconductor orders and semiconductor business, applied materials already talked about their orders rising about 3% sequentially. You yourself seem to be probably even greater than that and your semiconductor revenues also have jumped up. I think you’re around $5.5 million just excluding the polishing supplies. So do you think that the work in the semiconductor business is now behind or is there a little bit of a seasonal uptick right now?

Bradley C. Anderson

I think what we see there as relates to the semiconductor business, from time to time we’ll get a large, I’ll call it a refurbish or type of system order, that can have a traumatic impact on any quarter your book to bill ratio and so we’ve got a couple of nice orders as relates to that for Bruce that probably more polishing equipment orders than we have in the past and that’s helped to fuel that, but there’s nothing out there that we see that tells us that will be a consistent story going forward. We don’t have that visibility at this time.

Ramesh Misra - Collins Stuart

In regards to the solar orders, you had some very strong quarters for two consecutive quarters and then this quarter seems to have slowed down. What’s going on over there, when do you expect orders to rebound? I know in the press release you guys said that your pipeline looks pretty good but if you can provide more information about that.

Jong S. Whang

Your order of pattern is coming from two different segments. One is our existing established customers extension plan and the other one is new customers that we are adding and when it comes to the repeat order, from our existing customers, and we are now dependant on their order of booking and order of processing patterns, and so looking at the pipelines, as I had been saying now for a couple years, we continue to stay strong and as to the timing or placement of orders, starting down from pipeline, and is moreover a pattern that we depended on customer purchasing timings and so we have some slow parts in the quarter we just passed, Q3, but I continue to remain very optimistic about the future order shaping up.

Ramesh Misra - Collins Stuart

So JS, you recently spent quite some time visiting customers and potential customers. Can you give us a sense of what the qualitative message or tone was from these people and clearly a lot of companies are talking about whether to pass the expansion but does that necessarily translate into a stronger business for you?

Jong S. Whang

I expect that it will translate to stronger bookings for the future quarters and what I see out there, as much as I pay attention to any potential hiccups and I don’t see that. I haven’t found any of the signs and they continue executing very aggressive expansion plans and so I was very [inaudible] by recent trips and directly integrating with the customers. I think it will be fine going forward.

Ramesh Misra - Collins Stuart

One quick question about this restructuring charge at Bruce Technologies. What’s happened as a result of the restructuring and what should be the impact on your P&L as a result?

Bradley C. Anderson

We obviously recorded $344,000 in the quarter restructuring charges and started to see some of the benefits in the quarter, but most of that will be coming in future quarters.

Ramesh Misra - Collins Stuart

So is that a better [cog] line or a better SG&A line?

Bradley C. Anderson

It’ll be a combination of both to the [cog] and SG&A. But relatively speaking to the company on a consolidated basis, I would factor in a lot of benefit from that. It’s just something we needed to do to get them back into more of a consistent, profitable basis.

Operator

Your next question comes from Manoj Nadkarni with Chip Investor Group.

Manoj Nadkarni - Chip Investor Group

How are you guys capacity wise in being able to meet demand you are seeing in your backlog?

Bradley C. Anderson

I think the capacity is sufficient right now to meet that backlog to the extent that backlog continues to grow. We still need to be pushed a little bit to meet that as far as our solar furnace capacity y is concerned and we continue to look at what we can do to further that expansion into 2009. As we said earlier, I think one of the answers to the question, I think it was for one of the analysts, that we’re currently doing 7, 8 furnaces. We can do a little bit more than that on a quarterly basis from time to time but with that, that’s a fairly good run rate for us going forward.

Manoj Nadkarni - Chip Investor Group

How would that translate to revenue levels with your current capacity, let’s say you are at $24 million a quarter rate now, solar and semi combined, and I presume your capacity limitation, if any, would come first in the solar area?

Bradley C. Anderson

Sure it would. Our revenue guidance that we’ve given, as we mentioned, was about $22 million to $24 million f or the fourth quarter which translates overall for the year and that’s really as far as we’ve gone in giving guidance.

Manoj Nadkarni - Chip Investor Group

Secondly, if I may ask, did you add any new customers during the quarter?

Jong S. Whang

The answer is yes.

Manoj Nadkarni - Chip Investor Group

And that was on the solar side?

Jong S. Whang

That was on the solar side, yes.

Operator

Your next question comes from Tom Schwartz with Collins Stewart.

Tom Schwartz - Collins Stuart

The restructuring charge relating to Bruce, the $344,000, is that consistent with what you’ve talked about on the last call or has the scope of the restructuring in its totality changed at all from what you’ve talked about then?

Bradley C. Anderson

No. It is very consistent. I think in our last quarter press release and conference call, I believe we said about $360,000 so it’s really almost spot on with what we gave as the estimate.

Tom Schwartz - Collins Stuart

I just didn’t remember, you’d made a comment minutes ago saying about something continuing over future quarters.

Bradley C. Anderson

That was the cost savings from the restructure.

Tom Schwartz - Collins Stuart

Okay. So this will be the end of the restructuring charges? The second question is kind of a follow onto what that other gentleman just asked. I know you can’t go into a lot of detail about the profile of the solar business to a great extent but in terms of the distribution of solar residues between and among customers, is there any way that you could talk about that so we could get an understanding of all the solar residue for instance? How much came from Customer A or B or C or D, or how many total customers there were, what percentage of them are new versus people to whom you are sending follow on equipment, etc.?

Bradley C. Anderson

In our 10-Q actually we disclosed that for the quarter, you have to think of it as a quarter, one customer was about a third of our revenues, another one was I think 11% of our revenues. We don’t disclose that just from a practice and policy standpoint, however, I can say if you think about the public announcement we made back in I think October, the $15 million order for Yingli, except that was going to ship in the third and fourth quarters of 2008. That should give you a pretty good idea of who’s dominating our revenue pattern right now.

Operator

There are no further questions in the queue. I’d like to turn it back to management for any closing remarks.

Bradley C. Anderson

Thank you all for joining us today. We look forward to reporting to you on our progress and appreciate your continued interest in Amtech. This concludes today’s call.

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Source: Amtech Systems, Inc. F3Q08 (Qtr End 06/30/08) Earnings Call Transcript
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