ASYS - NASDAQ

Good day, and welcome to the Amtech Systems' Fiscal Second Quarter 2024 Earnings Call. Please note that this event is being recorded. I would now like to turn the call over to Erica Mannion of Sapphire Investor Relations. Please go ahead.

Good afternoon, and thank you for joining us for Amtech Systems' Fiscal Second Quarter 2024 Conference Call. With me today on the call are Bob Daigle, Chairman and Chief Executive Officer; and Lisa Gibbs, Financial Officer. After close of market today, Amtech released its financial results for the fiscal second quarter of 2024. The earnings release is posted on the company's website at www.amtechsystems.com in the Investors section. Before we begin, I'd like to remind everyone that the safe harbor disclaimer in our public filings covers this call and our webcast. Some of the comments to be made during today's call will contain forward-looking statements and assumptions that are subject to risks and uncertainties, including, but not limited to, those contained in our SEC filings, all of which are posted within the Investors section of our corporate website. The company assumes no obligation to update any such forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of today. These statements are not a guarantee 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 technologies used by customers and competitors; change in volatility and demand for products; the effect of changing worldwide political and economic conditions, including trade sanctions, the effect of overall market conditions, including the equity and credit markets and market acceptance risks; ongoing logistics, supply chain and labor challenges and capital allocation plans. Other risk factors are detailed in our SEC filings, including our Form 10-K and Forms 10-Q. Additionally, in today's conference call, we will be referring to non-GAAP financial measures as we discuss the second quarter financial results. You'll find a reconciliation of these non-GAAP measures to our actual GAAP results included in the press release issued today. I will now turn the call over to Amtech's Chief Executive Officer, Bob Daigle.

Thank you, Erica. So good afternoon, everyone, and thank you for joining Amtech's quarterly conference call. I'm pleased with the progress we're making to improve our cost structure and position the company for strong operating results as markets recover. Revenue of $25.4 million exceeded the high end of our guidance range and more importantly, we delivered adjusted EBITDA of $0.8 million with soft overall demand. The macroeconomic landscape for our target end markets remains mixed. Within the semiconductor industry, while we continue to experience softness in near-term demand for back-end packaging applications, we are seeing an uptick in near-shoring activities in North America and at Chinese OSATs as they add capacity. Within our materials and substrates end markets, we are seeing a similar balance in puts and takes. Consumables demand, particularly for silicon carbide semiconductor production has been lumpy due to customer buying patterns and softening in overall electric vehicle demand. However, we are seeing stronger demand for replacement parts in our foundry services. While we await the rebound and demand across broader markets, we continue to focus on optimizing our operations. Through the measures implemented over the past several quarters, we believe we have better aligned the size of our organization to support current market demand. This has resulted in near-term adjusted EBITDA profitability and will help us deliver strong operating results once the broader semiconductor market rebounds. Moreover, we are actively leveraging contract manufacturing partnerships to further enhance our operational efficiencies and provide more flexibility. For example, we showcased our first reflow oven assembled by one of our North American partners at a recent industry trade show. This milestone underscores our goal of creating greater flexibility throughout our manufacturing operations from components and assemblies through complete solutions to optimize our fixed cost structure, and this positions us well to capitalize on the major investments being made in the semiconductor industry to expand regional manufacturing. We are also building on the actions taken last quarter to refine our pricing to address input cost inflation experienced in recent years. New tool pricing is now more closely aligned with prevailing costs, and we are beginning to see the improvement in the margin profile of our backlog. However, it will be several quarters before we see the full benefit due to existing backlog in parts of our business. In summary, we remain focused on optimizing the aspects of our business within our control as we anticipate the next cyclical upturn in our target markets. The success of our initiatives have resulted in a second consecutive quarter of positive adjusted EBITDA and operating cash flow despite the prevailing softness in the markets we serve. Looking ahead, Amtech remains well positioned to capitalize on several secular trends that will drive demand for our products. Despite near-term softness in the electric vehicle market, advanced mobility applications, which include both hybrid as well as full electric vehicles are expected to remain a primary driver of growth for the industry. Within the broader semiconductor market, our tools play a critical role in the advanced packaging of processors used for an advanced high-performance computing as well as artificial intelligence applications. Also, with the backdrop of the pandemic and global tensions, sizable investments are being made by governments and industry to build more resilient and secure semiconductor and electronics assembly supply chains. This will create additional opportunities for our tools across the electronics industry. I'm confident that the strategic initiatives we are implementing to enhance operational efficiency and reduce working capital to generate significant shareholder value as our target markets regain momentum. And with that, I'll turn it over to Lisa for further details on the second quarter.

Thank you, Bob. Net revenues increased 2% sequentially and decreased 24% from the second quarter of fiscal 2023. The sequential increase is primarily due to increased consumable sales in our Material and Substrates segment as customers update their buying patterns and adjust inventory levels. The decrease from prior year is primarily attributable to lower sales across most of our product portfolio due to a slowdown in the broader semiconductor market. We ended the quarter with $44.3 million in backlog, a decrease of $5.7 million from December 31, 2023. Our book-to-bill ratio as of March 31, 2024, was 0.8:1. As we have commented previously, our lead times were extending too long. And now with our contract manufacturers, our lead times are improving. We are shipping out this equipment that was booked in some cases, several months over a year ago, which negatively impacted margins this quarter due to inflation over the past year. We've improved our lead times and our booking business with better margin profiles. We are also seeing margin improvement as a result of a product mix within our Material and Substrates segment, which had a 1:1 book-to-bill this quarter. GAAP gross margin was flat sequentially and decreased compared to the same prior year period. In our semiconductor segment, GAAP gross margin was negatively affected by product mix and increased material costs, both primarily attributed to shipments of our horizontal diffusion furnaces. GAAP gross margin in our Material and Substrates segment increased sequentially and compared to the same prior year period due primarily to a more favorable product mix with increased consumable sales, partially offset by lower equipment sales. Selling, general and administrative or SG&A expenses decreased $0.3 million on a sequential basis and decreased $3.2 million compared to the prior year period. The sequential decrease is due primarily to reductions in labor expenses, lower commissions and shipping expenses. Compared to the same prior year period, the decrease is due primarily to $1.5 million of lower acquisition expenses, $0.8 million of lower amortization expense as well as reductions in labor expenses and lower commissions and shipping expenses. Research, development and engineering expenses decreased $0.7 million sequentially and decreased $0.6 million compared to the same prior year period due primarily to the timing of purchases related to specific projects in our semiconductor segment. As you saw in our press release, during the second quarter of fiscal 2024, we sold our corporate headquarters building in Tempe, Arizona for a gain of $2.2 million. GAAP net income for the second quarter of fiscal 2024 was $1 million or $0.07 per share. This compares to GAAP net loss of $9.4 million or $0.66 per share for the preceding quarter and GAAP net income of $3.2 million or $0.23 per share in the second quarter of fiscal 2023. Non-GAAP net loss, which includes an adjustment to remove the gain on our building sale for the second quarter of fiscal 2024 was $0.2 million or $0.01 per share. This compares to non-GAAP net loss of $0.6 million or $0.04 per share for the preceding quarter and non-GAAP net income of $2.7 million or $0.19 per share for the second quarter of fiscal 2023. As a result of our building sale, we generated net cash proceeds of $2.5 million. We used these proceeds to fund approximately $1.2 million of CapEx during the quarter, primarily for the ongoing build-out of BTU's new smaller print building, which we expect to generate approximately $800,000 of annualized savings. The remaining proceeds plus additional cash on hand were used to pay down our revolving line of credit, which was paid in full as of March 31, 2024. Debt payments during the 3 months ended March 31, 2024, were $6.4 million. Our only remaining debt is our term loan was a balance of $4.2 million as of March 31, 2024. During the 6 months ended March 31, 2024, we generated $5.3 million in cash provided by operating activities, primarily due to improvements in working capital. Unrestricted cash and cash equivalents at March 31, 2024, were $13 million compared to $17 million at December 31, 2023. Net cash as of March 31, 2024, was $8.8 million compared to $7 million as of December 31, 2023. Now turning to our outlook. For the third fiscal quarter ending June 30, 2024, we expect revenues in the range of $22 million to $25 million with adjusted EBITDA nominally positive, which includes some expenses and production downtime associated with the BTU facility move. Although the near-term outlook for revenue and earnings remains challenging, we remain confident that the future prospects are strong for both our consumables and equipment serving advanced mobility and advanced packaging applications. We took actions during the first and second quarters of fiscal 2024, which will reduce Amtech's structural costs by approximately $6 million annually and better align product pricing with value. These steps should significantly improve results and enhance profitability through market cycles. Operating results can be significantly impacted positively or negatively by the timing of orders, system shipments, statistical challenges and the financial results of semiconductor manufacturers. Additionally, the semiconductor equipment industries can be cyclical and inherently impacted by changes in market demand. Actual results may differ materially in the weeks and months ahead. A portion of the Amtech results is denominated in RMB, Chinese currency. The outlook provided is based on an assumed exchange rate between the United States dollar and the RMB. Changes in the value of the RMB in relation to the United States dollar could cause actual results to differ from expectations. I will now turn the call over to the operator for questions. Operator?

[Operator Instructions] Your first question comes from Mark Miller of Benchmark.

Just wanted to ask about are you seeing -- can you comment about quoting activity? Have you seen any pickup in quoting activity? And if so, where?

Mark, yes, we definitely have seen a very significant uptick on back-end processing. So basically, the reflow equipment in particular. And I think one of the big changes versus when we provided the update last quarter is things were soft. We were seeing surface mount applications. We're now seeing a lot more in the advanced chip packaging area. We're also seeing quoting activity, which involves multiple units where things had softened to the point where it was usually single pieces of equipment. And as I mentioned during the comments, one thing that's been interesting is that some of the quoting activity now is involving, I would say, the localization of manufacturing. We've had some North American quoting in particular, that seems tied to supply chain resiliency. That's on the back end. The other areas where we've seen some strength has been, I'd say, the parts and service side of the business as well at the front end, where we're now getting a much higher activity than we would have seen 3 months ago. So it's still a mixed situation, Mark. But I think at least we're seeing -- definitely seeing more signs of life than we were 3 months ago.

The improvement in consumables sales, I assume that impacted margins positively. Can you can provide any estimate how that aided margins?

Well, it did. I mean, certainly, you can see, I guess, on the non-GAAP gross margin line improved from about 43% to 45%. So it had a really nice impact. And that's the great business for us, right? That's what we were hoping to get to as we exited the polishing equipment business.

Your next question comes from Kevin Garrigan of WestPark Capital.

Team, great speaking with you guys again. Regarding softness across the broader market, are you seeing any light at the end of the tunnel? And do you think the recovery would be a snapback in demand? Or is it kind of more of a U-shape?

Yes. It's interesting, Kevin, in that. Again, we read the same things you're reading about the memory, for example, bookings have been quite strong, pricing has firmed up on the memory side of things, mostly related to AI. So I do think at least in applications related to AI, we're likely to see that industry come back a little bit stronger towards the end of the year, early next year. It's always a little bit complicated for us. It's kind of a -- in the case of consumables, it tends to be a little bit more real time and that, obviously, as volumes pick up, we tend to see that flow through pretty quickly. It's a little bit trickier with equipment because now you have to factor in utilization rates at the customer. And typically, they need to trigger utilization rates, let's say, in the 80-plus percent range before they start to increase equipment orders. So I think timing is a little bit trickier to predict in both instances.

Yes. No, that makes a ton of sense. Okay. Perfect. And then just as a quick follow-up, Lisa, I think you said in your prepared remarks that lead times are improving. Can you just remind us what your ideal lead times are? And when do you kind of see them getting back to normal?

Sure. So it can vary by product. The fact in the equipment that Bob was referencing, those lead times can be 4 to 6 weeks. Some of the equipment we talked about this quarter that negatively impacted our margins like the horizontal diffusion furnace. And we have lead times of over a year on that equipment. We've certainly brought that down. And on our high-end belt furnaces, I would say that's come down to a handful of months now.

Yes. And I'd say, even on horizontal diffusion furnaces with supply chain lead times, probably a more normalized time frame would be, let's say, 4 to 6 months, maybe closer to, say, 5 to 6 months if the backlog is under -- at a reasonable level. But we're going to -- we're moving into a mode, frankly, with the things we've done from an operational standpoint, leveraging subcontractors where our goal is really to drive our cycle times down to minimum based on supply chain, how long it takes to get in our components to manufacture. With the idea that part of the margin headwinds we had on some of this equipment came partly because, yes, we quoted it over a year ago. So we've got to get our cycle times down so that make sure our pricing reflects current cost conditions more effectively.

Your next question comes from Craig Irwin of ROTH MKM.

So I was hoping you could maybe comment a little bit about the silicon carbide market, the wafers that are being produced today, there's a tremendous amount of interest in 8-inch wafers, but most of the production is really 6-inch today. Can you maybe tell us if there is an opportunity to offer a premium product on the Hoffman side serving the 8-inch market. Is there potentially another way to generate additional incremental value for Hoffman out of this business? How do you see yourselves positioned given your impeccable positioning on 6-inch providing most of the cassettes that were used out there.

Yes. So -- and as you point out, most of the market is at 6-inch today. And again, I do think -- and it depends on -- it really does depend on the customer. There's not one generic answer to that, Craig. But again, we're trying to position ourselves so that to the extent we can play in 8-inch that we can -- where possible, get some incremental value, but it will very much depend on who -- what the customer is and what their base technology is in the CMP area.

And then on the furnace side, I understand that there's -- Bruce has a very unique product for not just traditional power semiconductor production, but specifically for silicon carbide, given the much higher temperatures but the processes will run at, can you maybe give us a little bit of color on that product, what the pipeline looks like? It seems that even though there's a bit of an air pocket in the market with EVs and some of the industrial equipment in China, that there's still a pretty large amount of interest in facility construction. There's big plants, big facilities on the drawing board. Any color that you could share with us there about your potential activity?

Yes. So the demand requirements that we received from some key customers is fairly significant that there's some pretty large opportunities going forward. As you point out, timing may depend a bit on how much utilization there is in the industry. It's -- with a little bit of the -- frankly, the drop-off and more so expectations of EV. It may slow things down a little bit in the industry. But ultimately, at least the view I have is the industry is going to migrate -- continue to migrate pretty aggressively towards silicon carbide because of the efficiency of the inverters. So I think some of what's been going on in terms of a little bit of the slowdown and EV market may affect timing, but I don't think it changes the trajectory we're on. I think the wildcard is also -- because we do participate -- we participate in the EV, but we also participate pretty significantly in the power electronics for hybrid electric vehicles. And in particular, I'd say the direct bond copper furnaces that are used for these silicon-based IGBTs are fairly sizable part of our business at BTU. With this pivot maybe and a greater emphasis on HEV in the near term, that could present additional opportunities for us in the silicon-based power module packaging.

So you've been doing a really good job managing cash, right, getting to a net cash position this quarter. Usually, when there's an air pocket like we've seen sort of in the macro in silicon carbide, it's a good time to continue conversations around acquisitions. How active are you on the M&A side? I know there's some very interesting properties out there, both on the materials and consumables side that actually directly play into silicon carbide and traditional power semiconductor markets. How likely are we to see you step up and maybe grab something or consolidate something? Is this a priority today?

I'd say our near-term priority was obviously around the goal of being cash flow positive with the current market realities and a sluggish industry. But ultimately, we're a growth company. Ultimately, we are -- see a tremendous opportunity in the power electronics area, and in particular, silicon carbide. So it's an area we are spending time. I can't really say too much, Craig, about what the timing might be. But in terms of it being a strategic priority for us in terms of trying to bring more breadth, more exposure, more growth drivers in this area. It's definitely a priority for the company.

Excellent. And then last question, if I may. You did exceed your revenue guidance in the quarter. It seems that your visibility is pretty good, at least in the short term. Can you maybe comment about anything that's changing materially for the back end of the year? Is there may be a sentiment that investors might appreciate -- a little color around that you could give us to help us understand sort of where this visibility reaches out to, right? Do you have visibility through December? And how would we see that play out?

Yes. So I think, again, we have to talk about the various segments. So if you look at -- in the furnace area, whether it's horizontal, the fusion furnace or the ovens we're providing for things like direct bond copper applications, we're -- again, that's a high percentage of our backlog is in that area and takes us out through the December quarter. If you look at the consumables part of the business, that tends to book and ship even within the same quarter, relatively short lead times, and we'll tend to get that up pretty quickly. So there's not -- the visibility tends to be more medium, long-term forecast we get from our customer base. And again, that's going to depend on ultimately market demand to drive that. And that's also true, frankly, the parts and service. We've seen quite a bit of a pickup in recent weeks and months in terms of activity there, signs of life in the industry. But it's not like we have great visibility beyond a month or 2 in that area because those tend to be pretty short lead time items. And as Lisa mentioned earlier, even on the back-end packaging equipment reflow, surface mine as well as chip packaging, we're -- our lead times are 4 to 6 weeks. So there's not really an incentive, frankly, for customers to book things out 6, 9 months ahead of time. They don't need to. They can get equipment pretty quickly from us. So it's really a mixed bag. I'd say where we have the most visibility is really in the furnace area because of the long lead times historically.

And Craig, I would just add on the gross margin side, we expect a fairly similar product mix going into Q3. So I think we'll see some of these headwinds that we saw with material costs kind of repeat again in Q3. We do expect incremental improvements in Q4 and into fiscal Q1 as we're shipping out some of this older backlog and then beginning to ship out the newer quoted backlog that has the higher margin quotes that we've been using.

I'll take the rest of my questions offline. Congratulations on the revenue results. It's good to see you guys executing.

Great. Thank you, Craig.

There are no further questions at this time. I would hand over the call to Bob Daigle, CEO, for closing comments. Please proceed.

Well, thank you again for joining our conference call, and I look forward to updating everybody on the progress we're making in the months to come.