Good day, and welcome to the Amtech Systems Fiscal Third Quarter 2020 Conference Call. Please note that this event is being recorded. I would now like to turn the conference over to Erica Mannion of Sapphire Investor Relations. Please go ahead..

Changes in the technologies used by customers and competitors; change in volatility and the 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; capital allocation plans; and the worldwide COVID-19 pandemic.

Other risk factors are detailed in the company's SEC filings included in Form 10-K and Forms 10-Q. I will now turn the call over to Michael Whang, Chief Executive Officer..

Thank you, Erika. Before Lisa reviews our third quarter results, I would like to provide an update on how our business is faring through the economic downturn created by the global pandemic. I am pleased to report that all of our global manufacturing facilities remain open.

And thanks to the diligent efforts of our supply chain team and manufacturing partners, the third quarter, we saw minimal disruptions to our business. The global impact of the pandemic continues to create challenges.

And given the risks and uncertainties surrounding potential resurgences, we must remain vigilant and react quickly when the issues are discovered. Shifting to end markets. We have continued to see stronger demand from those geographies, which were first impacted by the pandemic, namely in the Asia Pacific region.

In addition, we are beginning to see demand aligned with the end market exposure. For example, those customers with a heavier exposure to the automotive industry are taking a more cautious approach to capital expansion initiatives as they evaluate the true level of end market demand in the coming quarters.

Inversely, those customers who tend to have higher exposure to faster design cycle industries, such as consumer electronics, are continuing to execute on plans for next-generation products. It is worth noting, however, that even these customers remain more cautious than usual as they evaluate the overall economic environment.

As the world shifts to focus to the timing and slope of a potential economic recovery, we think it is important to remind investors how macro demand drivers translate into orders for our products.

Within the power semi market, for example, demand for our products is closely tied to capacity expansion initiatives, with customers placing orders a few quarters ahead of bringing new capacity online. Historically, some of these customers have been cautious to add capacity ahead of realized increases in market demand.

And as such, in the current environment, we would expect them to remain cautious until there is greater visibility on the global economic outlook and demand. Although our strong industry position remain closely aligned with our customers, and we continue to believe expansion plans are a matter of when, if not if.

Within the silicon carbide power market, demand for our product stems from both equipment sales ahead of expansion as well as consumables, which are purchased as needed on a recurring basis. Related to the equipment, similar to the power semi market, some of our customers have historically been cautious to add capacity ahead of market demand.

In addition, as it relates to new products, there are generally a qualification cycle up to one year before volume shipments begin. Our consumable products, given our leading market share, growth in demand tends to align with industry growth in wafer starts.

With that said, we are starting to see green shoots activity that provides momentum and growth support for power semiconductors. As an example today, we announced a follow-on order for our semi compliant, fully-automated high-temp 300-millimeter diffusion furnace from a top-tier power semi customer.

Not only does this order further validate our market leadership position in the 300-millimeter horizontal diffusion furnaces, it also demonstrates the robustness of the long-term growth drivers for power semi devices and the willingness of customers to expand capacity to serve the growing market.

With an increasing number of automotive manufacturers announcing plans for electric vehicle platforms in the years ahead and demand drivers, such as 5G in the telecom market and automation IoT in the industrial market, the magnitude of power semis opportunity, including silicon carbide power devices both for the market as a whole and as well as our product specifically remains large.

While we remain excited as ever about the mid- to long-term opportunities in front of us. In the near term, growth catalysts for our business will likely be tied to our customers' confidence in the economic outlook and demand growth.

Given this dynamic, we feel fortunate to have a business that is well equipped to navigate times of uncertainty like those we find ourselves. Now as we demonstrated in the third quarter, despite a 28% year-over-year decrease in revenue, we, again, delivered gross margins in the high 30s with a nominal net loss.

The stability of these results, in part, comes from our diversified exposure across the semi industries manufacturing chain. As well as our well recognized brands, distinguish technologies and best-in-class service capabilities.

With market-leading position in each of our end markets, which go back decades, we are in a strong position of having a solid foundation on which to operate our business while we wait for the inflection of future growth drivers.

We are also continuing to take advantage of this current market environment by making the necessary investments to support our customers and capture the growth ahead.

In the third quarter, for example, we participated in the SEMICON West Virtual Event, which provided us an opportunity to stay engaged with our customers and showcase our leading-edge innovation in the power semi and silicon carbide markets.

As the world moves virtual, we are pivoting within our own organization to ensure we remain aligned with the needs of our customers. We, likewise, remain committed to our strategic initiatives, namely new product development to drive organic revenue growth and continuous operational improvement.

In addition, we continue to evaluate strategic acquisition opportunities to expand our product and technology portfolios and build upon our strengths in the areas that we believe will outgrow the overall semi market.

With the actions we are taking, we believe we can emerge from these uncertain times in a position to outgrow the market, and increase operating leverage to drive higher profits and maximize shareholder value in the years ahead. And now I'll turn the call over to Lisa to review our third quarter financial results..

Thank you, Michael. Net revenues increased 5% sequentially and decreased 28% from the third quarter of fiscal 2019 to $15.2 million.

Semiconductor and silicon carbide LED revenue in fiscal Q3 2020 increased sequentially due primarily to our Shanghai facility returning to normal operations after the extended Chinese New Year in fiscal Q2, and increased consumable and machine shipments in our silicon carbide LED segment.

Semiconductor and silicon carbide LED revenue decreased compared to the third quarter of fiscal 2019, primarily due to global COVID-19 impacts on our customers. At June 30, 2020, our total backlog was $15.2 million compared to backlog of $19.6 million at March 31, 2020.

As a reminder, backlog includes customer orders that are expected to ship within the next 12 months. Gross margin increased in the third quarter of fiscal 2020, both sequentially and compared to the same prior year period, primarily due to favorable product mix.

Selling, general and administrative expense, or SG&A, in the third quarter of fiscal 2020 was $4.8 million compared to $5.4 million in the preceding quarter and $5.7 million in the third quarter of fiscal 2019.

Sequentially, SG&A decreased due primarily to payroll tax credits the company was able to claim as part of the COVID-19 legislation passed by U.S. Congress, the Cares Act.

SG&A decreased compared to the same prior year period due primarily to the payroll tax credits, not having our former automation segment included in our results and lower travel due to the COVID-19 pandemic.

Relocation and R&D expenses for our silicon carbide LED segment that were expected in the quarter shifted into the fourth quarter of fiscal 2020 due to shutdowns and delays resulting from the COVID-19 pandemic.

Additionally, we evaluated staffing levels and cost structures at all of our locations, and made staff reductions at our Massachusetts operations resulting in restructuring charges of approximately $200,000.

Operating results were breakeven, primarily from lower SG&A in the quarter compared to an operating loss of $1 million in the second quarter of fiscal 2020 and $1.4 million of operating income in the same prior year period. Looking at income tax expense on a year-to-date basis.

We had a provision for the nine months ending June 30, 2020, of $0.3 million, compared to $1.6 million in the same period of fiscal 2019. The provision for fiscal 2020 represents taxes primarily in our foreign jurisdictions. We were able to offset our U.S. federal income taxes due with the tax benefit received from our divestitures.

Loss from operations, net of tax, for the third quarter of fiscal 2020 was $0.1 million or $0.01 per share. This compares to income from operations of $0.9 million or $0.06 per share for the third quarter of fiscal 2019 and loss of $0.5 million or $0.04 per share in the preceding quarter.

Unrestricted cash and cash equivalents at our continuing operations at June 30, 2020, were $46.4 million compared to $49.3 million at March 31, 2020. As of June 30, 2020, approximately 11% of our unrestricted cash and cash equivalents was held outside the United States, mostly in China.

We continue to review our capital allocation plans to drive profitable growth. Year-to-date, for fiscal 2020, we have invested approximately $2.4 million in R&D and approximately $900,000 in capital expenditures. In light of the COVID-19 challenges, we are scrutinizing our planned investments and have reviewed budgets, ROI assumptions and timelines.

We will continue to invest in our business to support and fuel our future growth. Additionally, some of our R&D spending will shift into fiscal 2021 due to supply chain disruptions relating to COVID-19. We do expect substantially higher CapEx in Q4 as we place previously purchased equipment for our silicon carbide LED segment into service.

However, we do not expect a material impact to cash flows as the cash outflows occurred upon purchase, which was over the course of the past several months. We believe we have the balance sheet strength to navigate the current environment, support our business operations and maintain key investments that will support future growth.

We will also continue to carefully manage our operating expenses. Lastly, as we have stated previously, we will continue to pursue strategic M&A opportunities at the right price to enhance our technologies, product portfolio and capabilities to build upon our strengths in the high-growth areas in power semi and silicon carbide.

Now turning to our outlook. As we have discussed, we do want to caution investors that we expect COVID-19 to continue to have an impact on our fourth quarter results. Our outlook reflects the anticipated impacts as we understand them today.

However, given how slow the situation is, both for our own business as well as for that of our customers and supply chain, we would like to remind investors that actual results may differ materially in the weeks and months ahead.

For the quarter ending September 30, 2020, our fourth fiscal quarter, revenues are expected to be in the range of $13 million to $15 million.

Gross margin for the quarter ending September 30, 2020, is expected to be in the mid-30% range due to greater underutilization and anticipated differences in product mix, with negative operating margins resulting from the shift in relocation costs and R&D for our silicon carbide LED segment from the third to the fourth quarter.

The semiconductor equipment industry is 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 portion of Amtech's results are denominated in RMB, a Chinese currency. The outlook provided in this press release 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.

Now let's turn the call over to the operator for questions.

Operator?.

Thank you. [Operator Instructions] And we'll take our next – our first question from Jeff Osborne from Cowen & Company. Please go ahead..

Hey good afternoon. Thanks for taking the questions. A couple on my end, Lisa. On the guidance, I missed it when you were talking about the gross margin being in the mid-30s. Can you – you mentioned something about mix and then something after that.

Can you emphasize what the mix is?.

It's a combination of the lower volumes, so some underutilization and then product – a change of product mix..

And is that within the semiconductor segment or both segments?.

I think it's primarily within the semiconductor segment..

Got it.

And then is there a way you can quantify what the government benefit was in the quarter? Or give us an indication of what the right OpEx run rate is in the current quarter?.

Yes. I mean I think that the – it's a little bit difficult right now because, obviously, travel is also slower because of COVID. But I think that – I hope that our normal SG&A is – it's probably closer to the Q2 number, somewhere in that range going forward, around $5.4 million..

And R&D is consistent? No major changes there?.

It will go up in Q4. That's built into our guidance as we continue some of those costs that we're expecting in Q3 shifted into Q4, which is a driver of why we think we'll have a loss in Q4..

Got it.

And I know there's no cash impact, but could you articulate what the CapEx ramifications are?.

Well, it's new equipment that we've been purchasing over the last several months for our new building for our silicon carbide LED segment. And some of those suppliers were shut down, and all of the different things that happened with COVID-19. But we're in that new building, we're placing that into service.

So I think that going into next year, we'll have some increased depreciation with that. But again, the cash has really already been outlaid over the last several months..

Got it.

And what was the cumulative price of all that equipment for the new facility? Is there a way to say it was $2 million, $5 million?.

It's probably in the $1 million to $1.5 million range..

Got it. Okay. And my last question for Michael was on the – so obviously, orders down and clearly, COVID, a lot of uncertainty at your customers and then their customers, in particular, in auto, as you said.

Can you just talk about the constructiveness of the conversations with your customers? Or is it sort of head in sand? Or are they more responsive or less responsive, now that we're four or five, six months into the COVID, depending on where you are in the world?.

All right, Jeff, thanks for joining us. I remain very optimistic based on the more recent trends. We're seeing more customer activities. In the frequency and quantity of our discussions, our customers have increased, primarily in the semi segment.

So that gives me optimism that we're just right on the cusp of potential momentum, right? The actual timing is difficult to see when that would be. That's all dependent on our customers' actual needs.

But I'm definitely heartened by the fact that, as I said earlier, the frequency and the quality of our dialogue with our customers has gotten much better compared to Q2 and early Q3..

It’s great to hear. That’s all I have. Thank you..

Thanks Jeff..

Thank you, Jeff..

[Operator Instructions] And we'll take our next question from Mark Miller from The Benchmark Company. Please go ahead..

What are you thinking about in terms of your tax rate going forward into next year, next fiscal year?.

Mark, I think that it's going to be fairly similar to what it's been these last couple of quarters. There are higher rates in some of our foreign locations. So we're paying taxes on that rate differential. But income generated in the U.S. can be offset.

So I think it's going to look kind of like what it looks like this quarter and last quarter, fairly similarly, I think..

And what was your CapEx spending in the fourth quarter?.

Year-to-date, we spent about $900,000 – $800,000 to $900,000 in CapEx..

Alright, thank you..

Thank you, Marc..

Great. And we have no further questions. This concludes today's question-and-answer session. I would now like to hand the call back over to Lisa for any additional or closing remarks..

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

And that does conclude today's call. Thank you for your participation. You may now disconnect..