J.S. Whang - Executive Chairman Fokko Pentinga - President and CEO Robert Hass - VP, Finance and CFO Michael Wang - VP, Operations Lisa Gibbs - VP, Corporate Controller and Chief Accounting Officer.

Jeff Osborne - Cowen & Company Philip Shen - ROTH Capital Partners.

Good afternoon and welcome to the Amtech Systems Second Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. Please note that this event is being recorded. I would now like to turn the conference over to Robert Hass, Chief Financial Officer. Please go ahead, sir..

Good afternoon and thank you for joining us for Amtech Systems second quarter fiscal year 2018 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, Robert Hass, Amtech's Chief Financial Officer.

I would also like to introduce today, the two individuals promoted to Vice President in January as previously announced. First, Michael Wang, was promoted to Vice President, Operations..

Good afternoon..

And Lisa Gibbs has been promoted to Vice President and Chief Accounting Officer, while retaining her responsibilities as our Corporate Controller..

Good afternoon..

Thank you. After the close of trading today, Amtech released its financial results for the second quarter of fiscal year 2018, ending March 31, 2018. That earnings release will be posted on Amtech's web site 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 in volatility and the demand for our products; the effect of changing worldwide political and economic conditions, including government-funded solar initiatives and trade sanctions; the effect of overall market conditions, including the equity and credit markets; and market acceptance risks.

All the risk factors are detailed in our Securities and Exchange Commission Filings, including our Form 10-K and Forms 10-Q. I will now turn the call over to J.S. Whang, our Executive Chairman, to begin the discussion.

J.S.?.

Thank you, Robert. Thank you for joining our call today. We are happy to again report that our semi and polishing business are delivering on our planned objective of possessing a stream of consistent predictable earnings, and cash flow to balance our solar business cycle.

In our solar technology solutions business, as the global industry continues to evolve, we are building upon our distinctive technologies, while working closely with our forward-looking customers. Solar is a huge growth market.

Annual installed capacity in 2017 was around 100 gigawatts, almost double that of 2015, and the global momentum is for more and more reliance on cost effective renewable clean energy solutions.

The continuously expanding market for solar energy is a strong foundation for the ongoing development of manufacturing solutions that reduce the total cost of solar cell productions for residential, commercial, industrial, and utility scale end users.

Our customers look to leading edge technologies to protect and advance their positions in the marketplace. We have seen that, not only is technology differentiation a key driver of investment decisions, but so is cost.

So in conjunction the development of superior technologies in alignment with our customers' needs, we are constantly improving our cost position to better support both our longstanding and future customers.

In summary, we believe the combination of our solar, semi and polishing businesses position us well to enhance shareholder value over the long term. Now I will turn the call over to Fokko, our CEO..

Thank you, J.S. Welcome to our discussion today. As always, we appreciate your interest in Amtech. As J.S. mentioned, the consistent performance of our semiconductor and polishing businesses is again validated in our second quarter results.

Our business units BTU and PR Hoffman saw continued demand, that converted to meaningful performance in the quarter. We continue to elucidate focus on market needs from technology development to customer service.

We expect to see ongoing strength in our semi and polishing business in the second half of this fiscal year, given the high demand in the consumer electronics, automotive and power markets.

Now let's discuss our solar business; after a few quarters of good financial results, including last quarter, where we shipped over $50 million of solar, including Phase-II of a large turnkey project, the inherent fluctuations and the quarter-by-quarter bookings and financial performance was evident in our second quarter results.

We are engaged with our large turnkey customer, to assist in their next phase plans. We continue to look forward to a Phase-III order in the coming months. The solar equipment market is highly competitive, where price, payment terms, throughput and service capabilities are constant considerations.

We believe we have great technology, and are working diligently to best position our offering, to bring an all cost-to-value comparisons. We still have more work to do, and our global team is focused on delivering leading edge innovation, operational excellence and the highest level of responsiveness.

As we discussed last quarter, we are doing more strategic sourcing of components and evaluating the outsourcing of manufacturing of solar equipment to lower cost locations in China. We see this as a high priority, given the changes in the marketplace and the ongoing pricing pressure.

We continue to advance our technologies, like with the passivated emitter Topcon technology, based on a polysilicon layer made by low pressure CVD processes, that can produce N-Type bifacial cells with over 22% efficiency.

With these advanced technologies and continued system cost reduction, we position ourselves to effectively compete for market share. And now, Robert will go over the quarter's results in more detail.

Robert?.

Thank you, Fokko. Let's now review our second quarter fiscal 2018 financial results. Net revenue for the second quarter of fiscal 2018 was $32.8 million compared to $73.6 million in the preceding quarter and $32.9 million in the second quarter of fiscal 2017.

The sequential decrease is primarily due to the shipment in the first quarter of this fiscal year, of all the equipment for Phase-II of a large solar turnkey project. The timing of large semiconductor orders and shipments also contributed to the sequential decrease.

Compared to the prior year quarter, net revenue is relatively flat, with increases in semiconductor and polishing shipments, offset by decreases in solar shipments. Unrestricted cash and cash equivalents at March 31, 2018 were over $50 million compared to slightly more than $51 million at September 30, 2017.

At March 31, 2018, our total order backlog was $63.1 million, including $35 million in solar segment, compared to a backlog of $65.9 million, with $39.3 million in the solar segment at December 31, 2017. Backlog includes deferred revenue and customer orders that are expected to ship within the next 12 months.

Now, let's take a look at our view for the coming periods; the company expects revenues for the quarter ending June 30, 2018 to be in the range of $34 million to $37 million. Gross margin for the quarter ending June 30, 2018 is expected to be in the mid to upper 20% range, with operating margin slightly negative.

The solar and semiconductor equipment industries can be cyclical and inherently impacted by changes in market demand. Additionally, operating results can be impacted by the timing of orders, system shipments and financial results of solar and semiconductor manufacturers.

The results for the coming quarters will be significantly influenced by the timing of the Phase-III order of the 1 gigawatt turnkey project.

Operating results could also be affected by the net impact of revenue deferral on shipments, recognition of revenue based on customer acceptances, and meeting startup milestones of the turnkey production lines, all of which can have a significant effect on operating results. The substantial portion of Amtech's revenue are denominated in Euros.

The revenue outlook provided in this press release, is based on an assumed exchange rate, between United States dollar and Euro, a significant decrease in the value of the Euro relationship to the United States dollar, could cause actual revenues to be lower than anticipated.

I now will turn the call over the operator to start the Q&A portion of our call..

[Operator Instructions]. And the first question comes from Jeff Osborne from Cowen and Company. Please go ahead..

Good afternoon guys. Couple of questions on my end. I was wondering if you can give a sense of perspective of your bifacial customer? Are they producing modules today and shipping, like how is their business progressing and backlog etcetera, and I would assume that business momentum would be needed to get the Phase III order.

Any perspective you could give would be helpful?.

Yeah. I will try to do that Jeff. These customers maybe not necessarily exactly like others. They are a really new startup, in a region where there is now solar at this moment. So we just started up Phase I and we still need to go through the last phase of our factory final acceptance.

In the first two, there was first the gutter machines installed in all operational, so we got our first acceptance by there. And then the second was to get the throughput of everything. Now we are getting very close to the third part, that is showing efficiency in the yield, so we are not fully producing yet.

For them, the market, of course the whole solar market is difficult than the other side. They are building up their business. So the timing there, I think it's important that we finalize this Phase-I installation and Phase-II installation will start in just a few weeks. So it's really coming closer to the point that they can go to the next phase.

And so you only have an order when you have it, right? So it's not there yet, and I would have hoped it would have been a little bit sooner.

But these new startups take a bit more time, and there is not necessarily an issue with their output of their sales channel, and I think that does not necessarily affect the next phases of this project to follow..

Got it. That was great to hear. Fokko, any sense of perspective on activity levels with other folks outside of these turnkey customers.

Is anyone else in the pipeline or funnel, or potentially close to placing an order? Is the near term backlog growth largely dependent on this one person or one company?.

Well this one company of course is a very big one, and it uses all of our equipment. So we have individual equipments in different companies.

But if you look at major projects for turnkey, I think we will have our hands full, if everything goes according to our plan next year to handle all of what's needed here, because we always said it was a gigawatt option that the ticket number and reality is a little bit more. And so we should have our hands full with that.

But more and more, when we get to be able to sell also the next level technology, the Topcon, I think that will open a lot more of the potential turnkeys a little bit further down the line. But that's something we work on now.

I am more than happy if we will get the next phases, in the not too short term from now on, I would be more than happy with that, and take them to the next level for somewhat higher efficiencies..

Makes sense. Two other quick ones; just trying to get a sense of share count here in the June quarter. Have you been pretty active in the buyback? Any thoughts on how we should be modeling share count? And then the second one, is it on the semiconductor side, came in a little bit stronger than you were expecting this quarter.

Can you just remind us, the cycle time between order and revenue recognition on the semi side, the PR Hoffman, as well as BTU? Was there some sudden turns from the end market, quick turn business that popped up to lead to the revenue strength there, or any sense of perspective would be helpful?.

Well I can do on the second part Jeff. With especially PR Hoffman, that's a relatively short time between booking and shipping. So that's a turnaround, I wouldn't say of days, but sometimes it is very short. So that's just the market doing good for shipments in this quarter. If you look at BTU, I think in general, it's a combination. The market is good.

It's also a short time between order and shipment for most of their reflow business. And the reflow business is going well, but also, they got some new products that are really doing good, taking a nice piece of the market.

We are a little bit hesitant to say, we are getting bigger market share, but it feels like that at least, and the market is just strong and good product. Besides that, what BTU calls the high temp, which is more the traditional conveyor belt furnaces [ph], is a bit of a longer term, between the order and shipping, and that is also doing well.

On a direct cup of bonding for the high power applications, and just as an example, but in general the heat treatment, and they are really definitely improving their position three years ago, they were struggling, and now at the high temp business is doing well, and that's a bit of a medium range, maybe four or five months type of cycle.

So it's a combination, and that market continues to be strong. However, there are things happening, where all of a sudden there are restrictions, and these could have affect also in the near term. But so far, we don't see that, let's say it that way.

And about the shares, maybe Robert can say a few words?.

So at this point, we have not repurchased shares in this quarter, and that will be reviewed in our next board meeting..

Got it. Thank you. Appreciate it..

[Operator Instructions]. Our next question comes from Philip Shen from ROTH Capital Partners. Please go ahead..

Hey guys. Thanks for the questions.

I was wondering if you might be able to give a view of the semiconductor business on an annual business? You are kind of in this $20 million kind of run rate per quarter, is $80 million a fair number or do you -- is there a potential for some decent growth in that segment this year? And if so, how much could it grow on a year-on-year basis, I think last fiscal year it was about $70 million.

So how much could it grow on an annual basis this year?.

Also there, the market has been strong so far Phil, and if we look back and say, well this is going to last a little bit longer. But we are a bit reluctant to say this 20 plus will continue for the rest of the year, although for next quarter, it doesn't look too bad at all.

But on the longer term, the whole semiconductor has been doing well, the whole electronics has been doing well, but we are very much dependent on the general world economic activities, and the outlook for that becomes a little bit less clear lately.

So if it would have gone the way it has been over the last 12 months, I would say yeah, a growth of what you have been sort of indicating, 10% a year wouldn't be unreasonable. But it's something we are -- it has been more positive over the last several quarters than we would normally expect.

So is it on a high period and how long will that last, that's a bit difficult to say. So for the longer term, we are not giving clear projection for that.

Does it help you?.

Yes, it does. Thanks Fokko. As it relates to the Phase-III order, I thought I heard you say in the prepared remarks, that it could be coming in the next month or perhaps you were saying --.

Yes. There was an answer at the end, yes..

Okay. Got it. And just kind of expanding on Jeff's question there, I think we have talked about this in the past, but I want to confirm; in the past you have said that operations have -- the results and the success with Phase-I was not required to the Phase-III purchase. But that was in the prior call.

In today's call it seems like, the success of the Phase-I launch and ramp-up and so forth may actually influence the Phase-III order and the timing.

Is that a fair thing to say, and if so, would they want to run that Phase-I plans for a period of time to ensure that, it's running smoothly? And it looks like Phase-III could be in the next few months, but is there a chance that it could be delayed -- how real of a chance that it could be delayed six months or even a year, because they simply just won't operate Phase-I and Phase-II?.

The last part is not something that I expect.

We are expecting to be in the next month, within that [ph], so it could be -- last time, I said a few, and sometimes, when you are looking forward to something, then a few is always longer than you'd like, right? But it's not something where we expected to be a longer period, to wait and running those lines.

The reality is, if you want to do cost effective solar, if it was just a few hundred megawatts, you are not getting there. So you have to go aim for the full, that's number one. Number two, of course, this line is easy to modify to higher efficiency.

So if you startup a new line, it's already a big challenge to get all of your supply chain going and all your people sufficiently trained, and so, that is the first part which is important for them now. But then later on also, go to higher efficiencies and this technology lends itself very well for that.

So now I do not think, and we do not expect this kind of delay very long. A month or two of the company, where you have to perform every quarter that always sounds long. But still, that's what it looks like at this very moment..

Okay.

And then, again on Phase-I, should we know by the next quarter, how the Phase-I ramp-up is going? In other words, are you hitting the efficiency targets and the cost structure, that cost structure targets that you guys laid out? Should we know by August, when you report the next quarter, if that's running pretty well?.

I am pretty sure about that. Because everything's going really smooth and the cooperation with customer is extremely good, and we are getting all the support we need from our friend.

So everything is going very-very well and efficient here, maybe next time, I can tell a little bit more, hopefully, than be able to announce the next phase, and maybe we can talk a little bit more about the type of the customer and so on..

Okay. And then, we have seen, again I think Jeff talked about the potential activity out there, but it sounds like beyond this one customer, it still might be a little bit quiet, as it relates to maybe another meaningful order of this kind of magnitude, maybe a gigawatt or half a gigawatt.

Competitively, what do you think you guys needed to do to change that? What's holding back the activity, as it relates to our N-Type and even PERC tools and other tools.

Has the competitive landscape or offerings, have they kind of caught up a little bit, or is it typically a price question? What can you guys do -- what are the bottlenecks, if you will, that's holding back, but ultimately you can address to try to get greater flow of business?.

Well first of all, pricing causes a big issue, especially with local, and there is no secret. We are working in outsourcing in China to get our prices more in line with what local competition does, that's number one. And that will take a little bit of time, but we will take care of that part.

If you look at PERC for example, there's quick changes there. It used be all go to N-line PECVD and now, a lot goes apparently to using the batch ALD tools. So we will have to find a good way to counter that way, the market is going, and I am sure we will be able to -- I didn't specifically mention that in this call, but will do that next time.

So that we have to counter that one. In the PERC, it is also a bit more difficult at the moment. What it will make a difference for turnkey -- while first of all, turnkey is of course not something that comes along every day.

We are one of the few who really do it, and I think the high volume production capability for the Topcon type of technology, with the poly-passivated emitter.

We do a lot of work on that one, and of course, a lot of customers do that too, and I think that will help us in a couple of quarters from now, to make sure that that is an area where we also can offer higher efficiencies. Which is an add-on to the present offering, but that makes it more competitive to mainstream B-Type PERC technology.

So that's what our main focus is, on the development. But it all combines with the lower cost in the future, and having all the equipment at high throughput. So there is still a lot of work to be done for us to catch-up with local combination of our cost of technology and the throughput. But we are taking care of all three of them.

So I am quite convinced that we will be able to manage that..

Okay. All right. Thanks Fokko and team. I will pass it on..

Thanks Phil..

[Operator Instructions]. Seeing that there are no further questions, this concludes our question-and-answer session..

Thank you for your time today and for your interest in Amtech. This concludes our call for today..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..