Amtech Systems, Inc.

Good day, and welcome to the Amtech Systems Fiscal Third Quarter 2021 Earnings Conference Call. Please note that this event is being recorded. I'm now going to turn the call over to Erica Mannion of Sapphire Investor Relations.

Good afternoon, and thank you for joining us for Amtech Systems Fiscal Third Quarter 2021 Conference Call. With me today on the call are Michael Wang, Chief Executive Officer, and Lisa Gipps, Chief Financial Officer. Also joining us today is Paul Lancaster, Amtech's Vice President of Sales and Customer Service. After close of market today, Amtech released financial results for the fiscal third quarter 2021. The earnings release is posted on the company's website at www.amtechsystems.com in the Investors section. During today's call, management will make forward-looking statements. All such forward-looking statements are based on information available as of this date, and the company assumes 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 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 risk, capital allocation plans, and the worldwide COVID-19 pandemic. Other risk factors are detailed in the company's SEC filings, including its Form 10-K and Form 10-Q. Now, I will turn the call over to Michael Wang, Chief Executive Officer.

Thank you, Erica. AMTEC continues to deliver strong momentum in the third quarter with revenues of $23.1 billion coming in at a high end of our expectations. Of note, this marks our third straight quarter of double-digit control growth following the demand softness we experienced during the pandemic. Activity within the semi-market continues at a strong pace, with record-booking and continued upside opportunities across our service markets. For our advanced packaging products, we are seeing strong momentum from both robust and market growth, as well as increasing adoption of our next-gen Paramax TrueFlat product across both new and existing customers. As you may recall, our TrueFlat product serves the needs of advanced packaging customers for very thin PCB substrates. delivering both increased yield and throughput. For products targeted at the SMT market, demand is strengthening across all geographies as customers gain confidence in the economic outlook and restart investments in both capacity expansion initiatives as well as ongoing replacement cycles which were placed on hold during the pandemic. As a result, market demand for our products has surpassed the capacity of our Shanghai facility, creating the need to temporarily increase intern capacity to serve our customers. Fortunately, the timing of this in-market strength aligns with our plan to move to a larger production facility later this month. Within the power semi-market, we continue to have strong engagement with our customers as they move forward with their capacity expansion plans to meet growing demand for power chips driven in part by the automotive sector. In addition to the orders we received last quarter for six 300-millimeter HDR diffusion furnaces, quoting activity has increased with both existing and potential new customers. Beyond the near-term top-line benefit, as existing orders gradually roll backlog to revenue over the next few quarters, the increase in dialogue signals a broader transition to 300-millimeter manufacturing processes for the power semi-markets. Given our leadership position as a tool of record for nearly all of the current power chip manufacturers already producing on 300mm, we believe we are well-positioned to capture additional opportunities as they emerge. Overall, we continue to be pleased with the performance of our semi-segment. Strength in demand is continuing across our silver market as customers grow increasingly confident about their own demand outlook and in turn begin to accelerate capital expansion plans. Illustrating this strength, the third quarter, our book-to-bill ratio for the semi-segment was 1.4 to 1, following a strong 1.7 to 1 in the prior quarter. As demand for our product tends to correlate with overall semi-cap-ex spending, we believe the strength and demand we are experiencing will continue to align with the broader industry. Moving on to our material and substrate segment, in the third quarter, equipment purchases, which were meaningfully impacted by the pandemic, continue to build with early orders rolling from backlog to revenue. Similar to our semi-business, we are seeing the start of a broad-based demand in industries such as silicon, optics, and ceramics as customers gain confidence in the global outlook. As these products contribute to revenue, there is the added benefit of incremental fixed-cost absorption in our PR Hoffman facility as we await the ramp of silicon carbide. Evidence of this can be seen as segment's third-quarter gross margin, which improved 17 points sequentially to 41%. As it relates to larger multi-year capacity expansion plans for silicon carbide wafer producers, we continue to maintain a healthy dialogue with our customers and wait for finalization of their plans to increase wafer output. As a reminder, the lead times for our products are often shorter than those of device manufacturing equipment. And as such, we would expect to see an uptick in demand once new production volume wafering capacity is brought online to service the needs of new device manufacturing facilities. Given our market-leading position in consumables, roadmap for new machine platforms, and recently completed capacity expansion investments for silicon carbide manufacturing operations, we remain as excited as ever for the mid- to long-term opportunities in front of us. While we are encouraged by the strengthening of demand across all of our served markets, we remain cautious about the ongoing market of certainties which we do not directly control. Industry-wide challenges such as supply chain constraints, inflation, and significant increases to freight and logistics costs require ongoing management and vigilance. Thus far, we have been successful in navigating these challenges. However, the risk remains both to ourselves as well as our supply chain partners and customers. That said, looking beyond these near-term uncertainties, we strongly believe our leadership and market segment with exposure to several secular tailwinds create a significant opportunity to drive increased profitability and shareholder value as demand accelerates and we realize the operating leverage built into our current business model. With that, I will now turn over the call to Lisa.

Thank you, Michael. Net revenues came in at the high end of guidance at $23.1 million, an increase of 17% sequentially and 52% from the third quarter of fiscal 2020. The sequential increase is primarily attributed to strong shipments of our advanced packaging and SMT equipment and increased shipments of our polishing machines. The same prior year period was affected by the COVID-19 pandemic. Gross margin increased in the third quarter of fiscal 2021, sequentially and compared to prior year, due to product mix and increased capacity utilization, partially offset by rising labor and material costs. Selling general and administrative expenses increased $1.6 million sequentially and $2.5 million compared to the same prior year period, due primarily to approximately $1.1 million in expenses related to our cyber incident in April 2021. as well as increased commissions on higher sales. We will file a claim with our cyber insurer in fiscal Q4 of 2021. Additionally, the prior year quarter benefited from approximately $0.3 million in COVID payroll tax credits and had lower travel and trade show expenses due to COVID. Research and development decreased $0.3 million sequentially and increased $0.6 million compared to the same prior year period due primarily to the timing of materials used in our strategic R&D projects. Operating income in fiscal Q3 2021 was $1.2 million compared to operating income of $0.2 million in the second quarter of fiscal 2021 and operating income of less than $0.1 million in the same prior year period. Adjusting for the $1.1 million of one-time costs related to our cybersecurity incident, Our operating income for the quarter would have been $2.3 million, or 9.8% of revenue, demonstrating the operating leverage built into our model. The income tax provision was $0.7 million for the three months ended June 30, 2021, compared to a provision of $0.5 million in the preceding quarter and $0.1 million in the same prior year period. Our effective tax rate continues to be higher than the statutory rate due to higher income in foreign jurisdictions. Income from continued operations net of tax for the third quarter of fiscal 2021 was $0.4 million or three cents per share. This compares to loss from continuing operations of $0.1 million or one cent per share for the third quarter of fiscal 2020 and loss of $0.2 million or two cents per share in the preceding quarter. Turning to cash, unrestricted cash and cash equivalents at June 30th, 2021 were $37 million compared to $40.4 million at March 31st, 2021. This decrease is primarily due to cash used to support our working capital needs due to our strong order flow, which includes increasing inventory and preparation for upcoming shipments scheduled in the fourth quarter of fiscal 2021 and the first quarter of fiscal 2022. Approximately 82% of our cash balance is held in the United States. Now turning to our outlook. For the quarter ending September 30th, 2021, our fiscal fourth quarter, revenues are expected to be in the range of $25 million to $27 million. Gross margin for the fiscal fourth quarter is expected to be in the upper 30% range due to a shift in product mix with a positive operating margin in the mid to upper single digits. The semiconductor industry is cyclical and inherently impacted by changes in market demand. and the recent semiconductor shortages may also have impacts on our customers and supply chain. Our outlook reflects the anticipated ongoing logistical impacts and related delays for goods shipped to and from China and production risks associated with our Shanghai building move expected to occur in fiscal Q4 2021. Actual results may differ materially in the weeks and months ahead. 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 AMTEC's results is denominated in RMBs, a Chinese currency. The outlook provided in this press release is based on 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.

Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to let us know to reach our equipment. Again, press star 1 to ask a question, and I'll pause for a moment to allow everyone an opportunity to signal for questions. And we do have a question from Jeff Osborne with Cowden & Company.

Hey, good afternoon. A couple questions on my end, Michael, if you don't mind. Can you touch on Did you forego revenue because of the Shanghai move? Would you have seen more strength this quarter, and that's providing some visibility into next quarter, or no?

No, no. We've maintained an incredibly strong weekly production process, and the move and the planning has been actually quite incredible by our team. We're moving within this month, and production will slow down just a bit during that time. So we accounted for that in our Q4 outlook. But things remain very strong and robust. We're quite confident in the team.

Got it. And it's great to hear about, on the PR Hoffman side, some new polishing machines being shipped. Are those to new customers for the Amtech umbrella, or are those for existing people that already have silicon carbide?

Just one clarification, Jeff. These are non-silicon carbide machine orders serving our traditional silicon optics, ceramic, and other substrates like sapphire. It's a mix of both current and new customers.

Specifically, the silicon carbide, what are you seeing on that front?

As Aaron Rodgers said, it's a beautiful mystery right now. So far, we have not seen any actual action to words from our customers. We still anticipate the expansion to occur no sooner or later than either the end of this year or early next year. To reiterate an example, Cree has mentioned several times once they bring their New York fab up and running, then they will then divert attention and focus to their materials expansion plan. So that's one barometer, and CREA is definitely like an early adopter market leader in terms of expansion plans and their current footprint right now. So the best thing that we can do and we are doing is preparing. We've made investments in our capacity. and we'll be ready when that order cycle occurs.

Got it. And then just one more, I think, on my side. On the 300-millimeter HTR side, certainly Infineon's made a lot of movement in that direction. Can you just talk about maybe keeping the sports analogy going? If this were a baseball game, you know, when you look at the broader scope of people in the power electronics space, whether it's the Crees, the Little Fuses, the... STs, the Infineons of the world. What inning are we in in moving from 200 to 300 millimeters? Part A of the question. And then B, what do you think that TAM is over the next three years in terms of high temperature furnaces that need to be acquired? Is this a couple tens of millions or is this north of 100 million that needs to be put in place to address some of the megatrends that you're going after?

We're probably looking at more than tens of millions across the next three years. We do serve just one process in the entire process chain. The process steps can vary from a few dozen to several with a different number of different process equipment. In terms of the beginning, we're still early on, right? Definitely the economics of moving to 300 millimeter is there, just based on raw surface area from 200 millimeter to 300 millimeter. However, it requires massive capital investments that a majority of the mid-tier power device players would be challenged to meet. So we're looking at mainly the tier one power device manufacturers.

Got it. That's all I have.

Appreciate the detail. All right. Thanks, Jeff. Thank you, Jeff.

And that will conclude today's question and answer session and today's call. We thank you for your participation. You may now disconnect.