Good day and welcome to the Amtech Systems Second Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Lisa Gibbs, Chief Financial Officer. Please go ahead..

Good afternoon, and thank you for joining us for Amtech Systems Second Quarter Fiscal Year 2019 Results Conference Call. With me on the call today are J.S. Whang, Amtech's Executive Chairman and Chief Executive Officer; Robert Hass, Amtech's Executive Vice President; and Michael Whang, our Chief Operating Officer.

After the close of trading today, Amtech released its financial results for the second quarter ending March 31, 2019. That earnings release will be posted on the company'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 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 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 freight sanctions; the effect of overall market conditions, including the equity and credit markets; and market acceptance risks.

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

J.S.?.

Thank you, Lisa. Thank you for joining our call today. In April, just our last month, we announced our intent to divest the majority of our solar business including all of Tempress and SoLaytec and to focus our attention and resources on our semi and emerging silicon carbide power business opportunities.

The solar segment financial results are now reported as discontinued operations and later on this call Robert Haas, our Executive VP will provide further details.

As we look to the future for Amtech Group, we have begun executing our plan to grow Amtech's profitable semi and silicon carbide LED polishing segment based on our core competency in former technology and substrate processing.

We believe there are many opportunities both organic and inorganic driven by emerging growth in new substrate such as silicon carbide and growing demand for power devices used in electrical vehicles and automotive sensors, consumer and industrial IoT, 5G and mobility, artificial intelligence and big data.

We believe Amtech is well positioned to capitalize on this exciting future. Our strategy consists of having timely product innovations to keep pace with the customers needs and capitalize on external opportunities to further enhance our growth. I will now turn the call over to Mike, our COO, he will discuss the market involvement and progress within.

Mike?.

Thank you, J.S. We are pleased with our second quarter results especially given that we are currently operating in a softer semiconductor market primarily impacted by the continued uncertainties and related effects from trade tariffs. The robustness of the U.S. market tempers the softness from Asia where we continue to find success.

However, if trade negotiation uncertainties remain for the longer term, this will negatively impact current industry estimates forecasting a rebound in the calendar year 2020. Nevertheless, long-term industry growth fundamentals remain strong and we are well positioned to participate in our customers' growth.

Our core semiconductor businesses which includes chip packaging and SMT continues to generate positive cash flow and good margins through relentless customer service culture and product innovations. Our chip fabrication business continues to enjoy good brand recognition.

The 300-millimeter power chip industry and we are confident our growing chip substrate business will be a strong contributor in the growing compound semiconductor industry to meet high performance power and RF device growth across multiple industry verticals.

In addition to providing new solutions to the ever evolving and expanding technical and capacity demands of our existing customers, we have taken steps to include implementing new sales and marketing initiatives in order to reach new customers that are making inroads into the growing compound semiconductor opportunities.

We are also adding capacity to our silicon carbide LED polishing segment as well as strengthening our internal capabilities to meet current and future needs of our customers.

We are constantly working to maintain and improve our operational efficiency and productivity with a goal to position Amtech to best leverage our strengths in relentless customer service, innovation and to drive profitable growth over the long-term. We believe our core competencies position us to grow with our existing and new customers.

We are enthusiastic about our opportunities for long-term growth. Our objective is to make organic investments to support growth in the fastest growing areas of the power chip and RF markets. Our capabilities with silicon and silicon carbide present opportunities to further drive growth and enhance our cash flow.

And now, I will turn to Lisa to review the second quarter financial results.

Lisa?.

Thank you, Mike. Let's now review our second quarter fiscal year 2019 financial results. Net revenue for the second quarter of fiscal 2019 was $20.6 million compared to $23.2 million in the preceding quarter and $21.1 million in the second quarter of fiscal 2018.

Sequentially, semiconductor revenue decreased by approximately $2.9 million due primarily to quarter-to-quarter variability of orders and delivery schedules of one customer. Silicon carbide LED revenue increased by approximately 0.3 million due primarily to increased machine sales.

Compared to prior year, semi net revenue decreased by approximately $0.5 million due primarily to weakness in the China market, while silicon carbide LED revenue decreased slightly by approximately $0.3 million due primarily to higher initial sales of consumable products in the second quarter of fiscal 2018.

Unrestricted cash and cash equivalents at our continuing operations at March 31, 2019, were $47.9 million compared to $45.9 million at September 30, 2018. At March 31, 2019, our backlog was $22 million compared to backlog of $23.7 million at December 31, 2018. Backlog includes customer orders that are expected to ship within the next 12 months.

The nature and composition of our backlog from continuing operations reflects shorter lead times and lower risk of cancellation when compared to previous quarters that included solar orders. Gross margin in the second quarter of fiscal 2019 was 38% compared to 39% in the preceding quarter and 41% in the second quarter of fiscal 2018.

Sequentially and compared to prior year, gross margins decreased primarily due to product mix most notably the type and volume of equipment and consumables sold in each quarter.

Selling, general and administrative expense or SGA, in the second quarter of fiscal 2019 was $5.8 million compared to $6.6 million in the preceding quarter and $6.3 million in the second quarter of fiscal 2018. Sequentially and compared to prior year SG&A decreased primarily due to lower headcount, employee-related expenses and professional fees.

Restructuring expense was $0.2 million in the second quarter of fiscal 2019 and $0.9 million in the preceding quarter. We did not have any restructuring expense in the second quarter of fiscal 2018.

Research development and engineering expense was $0.7 million in the second quarter of fiscal 2019 compared to $0.9 million in the preceding quarter and $0.8 million in the second quarter of fiscal 2018.

Income tax expense in the second quarter of fiscal 2019 was $0.3 million compared to $0.6 million in the preceding quarter and $0.4 million in the second quarter of fiscal 2018.

Income from continuing operations, net of tax for the second quarter of fiscal 2019 was $1 million or $0.07 per share compared to $1.1 million or $0.07 per share for the second quarter of fiscal 2018 and $0.2 million or $0.02 per share in the preceding quarter. Now turning to our outlook.

For the quarter ending June 30, 2019, the company expects continuing softness in the semiconductor equipment industry to result in revenue to be in the range of $19 million to $21 million. Gross margin in the quarter ending June 30, 2019 is expected to be in the mid to upper 30% range with operating margin in the low-single digits.

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

A substantial portion of Amtech's revenues are denominated in our RMBs. The revenue outlook provided in this press release is based on an assumed exchange rate between the United States dollar and the RMB. A significant decrease in the value of the RMB in relation to the United States Dollar could cause actual revenue to be lower than anticipated.

And now, I will turn to Robert Hass, our Executive Vice President to discuss discontinued operations..

Thank you, Lisa. Now I will provide a brief update on discontinued operations. The loss from discontinued operations for the quarter ended March 31, 2019, was $6.6 million of which approximately $4 million was due to the write-offs of the inventory and receivables, restructuring costs such as severance and other one-time costs.

We believe Tempress and SoLaytec will be a good fit for new owners committed to investing in the future of solar. We have engaged Oakland's small cap advisory [BB] [ph] located in the Netherlands to advise us on the divestiture of Tempress and SoLaytec and hope to complete a sale by the end of this calendar year.

Under the divestiture -- until the divestiture is completed, we expect much lower quarterly losses from discontinued operations excluding the results of any sale. There can be no assurance of finding a buyer or recovering the carrying value of these subsidiaries.

More importantly, we look forward to expanding our profitable semiconductor and best growing SiC/LED segments through both organic growth and the acquisition of businesses or products serving those markets. Now let's turn the call over to the operator for the Q&A section.

Operator?.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question today will come from Jeff Osborne of Cowen and Company. Please go ahead..

Hey, god afternoon guys.

Couple of questions on my end, on the silicon carbide market, can you talk about what the or maybe LED more broadly with silicon carbide? Can you talk about what the mixes of upfront versus recurring revenue and sort of the razor blade model of that segment in particular?.

Good morning, Jeff. There is a lot of words, I don't understand, kidding. What I can say is this silicon carbide specific component of that segments revenue is growing at the same rate, the industry is and the projection going forward is to continue at the forecasted industry growth rate..

Got it. Is there a bias though to -- more of a recurring revenue nature of that segment versus the upfront capital, you've had recent people in recent days talking about adding a billion dollars of CapEx, I'm just trying to get a sense of how much of your revenue stream is recurring in nature versus tied to facility expansions.

I think we're both on the same page at the market itself is growing very quickly?.

So in terms of revenue mix, I would say it tilted a little bit more to reoccurring revenue streams versus customer CapEx although there is an up tick on the CapEx side as well.

So, we're still digesting the news from what you mentioned that the billion dollar investment and from other customers in that field and where we're reacting accordingly including our capacity expansions and plant and equipment, internal capabilities and also revamping our sales and marketing strategy going forward..

Makes sense. And then there's a new segment in the 10-Q and in your release around automation.

Can you just talk about what specifically that is and J.S.'s prepared remarks he mentioned that you were getting rid of or selling getting rid of, but looking to monetize the solar piece for the bulk of it, but not all of it and reading through the 10-Q, it looks like there's still some solar exposure to automation, I just wasn't sure exactly what that is?.

Yes. I mean you're right. This is Robert. The solar segment was composed of Tempress which was the largest piece, SoLaytec and R2D, which provided automation to both the solar and the semi market. And of course, its focus during the past number of years has been on the solar side.

But we are looking at it to see if it fits into our new strategy and so it's not part of the sale..

Got it. That makes sense. And then, can you just talk about, I think Lisa mentioned the RMB and I'm trying to quickly find it here in the -- it looks like 20, 19-ish percent of revenue in the first six months was affiliated with China.

Is the Taiwan business also in R RMB or any other segments or is it a safe assumption that less than a quarter of your revenue just given what's going on in the next 24 hours around the trade talks. I'm just trying to understand what your exposure to specifically to RMB is..

So our China operations which is part of BTU, our backend part of the business that has -- what was this production in China and so its costs are in RMB, it does sell some in RMB, but largely most of its sales are in U.S. dollars..

Got it.

So is there a way to sort of dump that down that X percentage of your cost of goods is RMB exposed and Y percent of revenue is RMB exposed or no?.

We don't break it down that granularly..

Got it. Okay. And then, the last question I had is, can you just talk about -- you used the word acquisition in organic. I think two or three times in the prepared remarks.

Can you just talk about what the pipeline is there, over the past several years, you've kind of head waves of interest in acquisitions? Is that something that you're actively pursuing with the sort of new strategy around silicon carbide in semiconductors which makes sense?.

Hi, Jeff. It's J.S. Acquisition is a lot important part of Amtech's growth strategy. And we always pay our attention to capitalizing on those opportunities -- external opportunities. So, our effort is a continuing, it's not that we share any pipeline information in a given time..

Understand. Very good. Thank you..

Appreciate it, Jeff..

Thank you, Jeff..

[Operator Instructions] Our next question will come from [indiscernible] of Greenleaf Management. Please go ahead..

In your 10-K report on Page 9, you have a very brief description of your sales and marketing programs and it is very brief and if memory serves me correctly, you have really not addressed a sales organization in the past.

My questions are, do you presently have on staff an in-house sales force? And if so, what is the size of that particular group?.

Yes. We do have internal sales force and then we have a very large and extensive global agent network. The main functions of our internal sales force is to manage and work the opportunities with our global agent network and also to secure new customer opportunities..

Well, can you say who is the person responsible for managing and overseeing the S&M programs and does that person have daily interactions with your customers and the various independent sales reps and distributors that you stated?.

So, that's a shared responsibility between J.S. and myself along with the sales managers at our divisions. Each of them have their own internal sales force and agents. Now in terms of interaction, we do interact very frequently with our existing customers and new customer opportunities.

I wouldn't say it daily, but it's very frequent whether on direct sales calls, trade shows and other networking opportunities..

Okay. Thanks very much. Appreciate it..

Thank you. The next question will come from Mark Miller of The Benchmark Company. Please go ahead..

You indicated your automation segment included R2D, that segment it looks like it's been operating a loss for some time and I was just wondering what are your plans for that segment, are you going to keep it or try to increase its sales et cetera?.

Yes. So, we're definitely in the middle stages of evaluating that situation. Certainly, we are concerned about the losses as you are. But we're evaluating that to see if it's a fit or not..

What else besides solar equipment does it provide products for?.

It also provides automation for semiconductor fabs as well like [sorters] [ph] and other products -- automation products. Some of them quite advanced, quite sophisticated..

Thank you..

The next question is a follow-up from Jeff Osborne of Cowen and Company. Please go ahead..

Hi, guys. Thanks for letting me do the follow up. Very quickly, just a lot of moving pieces around the different reporting segments and what not. I'm just trying to get a sense of the OpEx run rate going forward. Is there any kind of one-time items in the recent quarter as you look at excluding the discontinued operations is what you just reported now.

A good run rate or should we think about expansion of expenses throughout the year..

I think for right now Jeff, this quarter is a fairly good run rate as we mentioned we're looking at where we would like to make internal investments and as decisions are made we'll update our projections. But I think for right now, it's a good run rate..

And then, is there any with the discontinued piece.

Is there anything that we need to be aware of as it relates to taxes either assets for sale or should it be sold?.

It's probably going to be a fairly complex tax situation. So, we're working closely with our advisors on it. But, we don't have enough information to say further on it. But it will be complex..

Got it. Thank you. That's all I have..

Thank you..

[Operator Instructions] This will conclude our question-and-answer session. At this time, I'd like to turn the conference back over to Lisa Gibbs for any closing remarks..

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

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