Amtech Systems Inc Q3 FY2023 Earnings Call

Good day and welcome to the Amtech Systems Third Quarter Fiscal 2023 Earnings Conference 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 third quarter 2023 conference call. With me today on the call are Bob Daigle, Chairman and Chief Executive Officer; Lisa Gibbs, Chief Financial Officer; and Paul Lancaster, Vice President of Sales and Customer Service. After the close of market today, Amtech released its financial results for the fiscal third quarter of 2023. The earnings release is posted on the company's website. 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 made during today's call will contain forward-looking statements and assumptions that are subject to risks and uncertainties. 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.

Thank you and good afternoon everyone. Thank you for joining our quarterly conference call. I'd like to take a couple of minutes to introduce myself and share some thoughts before I turn the call over to Paul and Lisa. I spent over 30 years in the electronic materials industry primarily at Rogers Corporation, a $3 billion publicly traded company where I held a variety of senior executive positions. My focus at Rogers was building profitable businesses and during my tenure, I led a circuit materials business that supported the wireless industry and a power electronics business focused on semiconductor packaging and interconnects. The foundation for growing these businesses included introducing new products for markets with strong secular growth trends and acquiring companies and technologies to close gaps and capabilities while focusing on margins to drive profitability and return on investment. During my two years on the Amtech Board, it's become apparent to me that the company has tremendous promise. We have great products and are extremely well positioned to capitalize on several secular trends. The electric vehicle market will drive growth for silicon carbide semiconductors due to their ability to both improve efficiency and drive down battery costs. Over time, silicon carbide semiconductors will also benefit a wide array of power electronic applications. Within the broader semiconductor market, artificial intelligence applications will experience explosive growth in the coming years. And the high-performance semiconductor processors needed to support AI will need advanced packaging. The pandemic and global tensions have highlighted the need for a more resilient semiconductor and electronic assembly supply chain. These secular trends will drive strong demand for our equipment and consumables. Our mission is to fully capitalize on these growth opportunities while addressing operational issues and making supply chain improvements needed to create meaningful shareholder value from this growth. Lisa will get into the details concerning last quarter in a minute, but I want to express my disappointment in our third quarter operating performance. We will address our gaps in performance and prepare the company to deliver meaningful value from these growth opportunities. We'll be presenting more information about our targets and plans on the next earnings call. Now I'll turn it over to Paul to discuss our end markets.

Thank you, Bob. Looking at the demand environment, we are experiencing a persistent low demand for our advanced packaging and SMT products which has been offset by continuous high demand for our high-temp belt furnaces used in a variety of applications including electric vehicles. As it relates to our Paramax products servicing the advanced packaging and SMT markets, we believe our competitive advantage allows us to weather the current challenges and positions us favorably to capitalize on significant opportunities during the next upcycle. As we navigate through this phase, we are continuously strategizing and investing in research and development to enhance our product offerings ensuring that we stay at the forefront of technology advancements. While we continue to have constructive conversations with leading OSATs, we remain cautious about the timing of a demand rebound for our semiconductor-related products due to uncertainties surrounding the macroeconomic outlook within the industry. Within the high-temp belt furnace market, the ongoing transition towards more complex systems and greater electrification particularly in the automotive sector has boosted the need for our high-performance furnaces. We are committed to meeting this rising demand and maintaining our reputation as a trusted supplier in the industry. In our Materials & Substrate division, we continue to see strong demand for our specialized silicon carbide products. As the industry works to grow both wafer capacity and output, many vendors are realizing the challenging differences between silicon carbide and silicon processing. Year-to-date bookings for our top silicon carbide customers are on par with their total bookings for the full fiscal prior year and in some cases greatly exceeding last year's total spend. Additionally, we have ongoing qualifications with new customers who are evaluating our silicon carbide consumables. Given our position as a long-time industry leader in the segments of the markets we serve, we believe our products are highly differentiated and provide significant improvements in total cost of ownership. As a result, as volumes increase, we expect demand for our consumable products to grow in line with overall industry wafer capacity estimates. As a reminder, our consumable sales into multiple end markets and we are currently seeing some softness in silicon, sapphire, and ceramics but we are very pleased with the continued demand for our silicon carbide-related consumables. In summary, while we're currently facing headwinds in the semiconductor division spending cycle, our strong competitive position instills confidence that we will emerge stronger during the next upcycle. Simultaneously, the high-end demand for our high-temperature belt furnaces and the optimistic prospects of silicon carbide in the Materials & Substrate division reinforces our commitment to innovation and excellence in providing cutting-edge solutions to our valued customers. I will now turn the call over to Lisa to review our financial results.

Thank you, Paul. Turning to our quarterly results. Net revenues decreased 8% sequentially and increased 54% from the third quarter of fiscal 2022. The increase from the prior year is primarily attributable to additional revenue from Entrepix of $7.2 million and increased shipments of our high-temperature belt furnaces. Additionally, during the prior year third quarter, our Shanghai factory was closed for two months due to COVID protocols. The sequential decrease is primarily due to approximately $1.5 million in revenue that shifted from the third quarter to the fourth quarter of fiscal 2023 due to three BTU customers pushing out delivery dates and operational challenges surrounding the implementation of our new ERP system at PR Hoffman. Gross margin decreased sequentially due primarily to product mix within our semiconductor segment. Gross margin increased when compared to the third quarter of fiscal 2022 as the prior year period was affected by the government mandated shutdown of our Shanghai manufacturing location. Selling, general and administrative expenses decreased $1.1 million on a sequential basis and increased $3.1 million compared to the prior year period. The sequential decrease is due primarily to acquisition costs of $1.5 million in the prior sequential period which were not incurred during the third quarter. Compared to the prior year, the increase is due primarily to added Entrepix' SG&A of $1.9 million inclusive of $0.7 million of amortization of intangible assets, as well as increased consulting and ERP project expenses. Research, development, and engineering expenses increased $0.3 million sequentially and increased $0.2 million compared to the same prior year period. GAAP operating loss was $1.1 million compared to GAAP operating income of $0.5 million in the second quarter of fiscal 2023 and GAAP operating income of $9.6 million in the same prior year period. Non-GAAP operating income was $0.4 million compared to non-GAAP operating income of $3.2 million in the second quarter of fiscal 2023. Income tax expense was $0.2 million for the three months ended June 30, 2023, compared to a benefit of $2.9 million in the preceding quarter and an expense of $20,000 in the same prior year period. GAAP net loss for the third quarter of fiscal 2023 was $1 million or $0.07 per share. This compares to GAAP net income of $3.2 million or $0.23 per share for the preceding quarter. Non-GAAP net income for the third quarter of fiscal 2023 was $0.3 million or $0.02 per share. Unrestricted cash and cash equivalents at June 30, 2023 were $14.3 million compared to $17.7 million at March 31, 2023. The cash decrease this quarter was primarily due to a decrease in our contract liabilities. To date, we have not borrowed any amounts under the revolver. Operating results can be significantly impacted by the timing of orders, system shipments, logistical challenges, and the financial results of semiconductor manufacturers. For the fourth fiscal quarter ending September 30, 2023, we expect revenue and operating profit to improve incrementally over the third quarter of fiscal 2023. A portion of Amtech's results is denominated in RMB, a 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.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. And your first question comes from the line of Mark Miller from Benchmark. Please go ahead.

Thank you for the question. I was wondering if you could break out the Entrepix bookings and backlog last quarter?

Hi, Mark. We put all of that into our Materials & Substrate segment. So unfortunately, we don't break out Entrepix.

Okay. Cash, you've been consuming cash for three consecutive quarters. Do you have a breakeven cash level? And what are your plans to address that?

Good question. We do have a breakeven cash level. We've had things like the ERP implementation this quarter, ongoing debt payments, and some tax payments that were part of the assumed liabilities of our acquisition. We've had strong subsequent cash receipts in July and we continue to focus on cash collections and payment terms of our customers. And again, we have the revolving line of credit if we need to tap into it, but we haven't yet.

Final question I'll jump back in the queue is about the inventories. Inventories did decline somewhat in the third quarter but they were up significantly from a year ago. Can you discuss that?

A lot of that relates to inventory builds related to our high-temperature belt furnaces that we build in Massachusetts and the raw materials necessary for those products. We have an enormous backlog that we're working through in that product area as well as we have inventory added from the Entrepix acquisition.

Yeah. Hi all. Great speaking with you again and Bob, congrats on the CEO role. I was just kind of wondering if you could give us a little more color on the operational challenges on the ERP systems. What are the challenges? How much of an impact to revenue were these challenges? And when do you think they would get resolved?

Sure. ERP implementations are always challenging. We implemented a new system at PR Hoffman because they had a very antiquated system. The production planning that was expected around that in terms of pulling in orders before go-live and then the ramp back up after go-live was disappointing to us. It certainly was an operational execution issue, so a big disappointment there. They've ramped production up significantly. So we're pleased with that and we're continuing to work through some challenges. I think we're over that hill of the go-live which was in early June. The amount of revenue we mentioned in the press release of $1.5 million was a combined number. We had a few shipments at BTU where the customers shifted their pickup dates into July, and the other part was the ERP issue, probably about 50-50 there.

Okay. Got it. That makes sense. And then, just quickly Lisa, can you just kind of remind us what the focus is for capital allocation for the rest of 2023 and anything with share repurchases?

Well, our big focus this next quarter is on cash collections, improving our cash conversion cycle, and really focusing on that. From a capital allocation perspective, we talk about that at the Board meeting every quarter. I think right now with our cash levels, share repurchases are not the highest priority, but that continues to be a focal point of our capital allocation discussions each quarter.

Okay. Great. Thank you.

Thank you.

Thank you. As we have no further questions at this time, I will now turn the call over to Mr. Daigle for closing comments.

Thank you. I'd like to thank you for joining the conference call. I look forward to meeting you in the weeks and months ahead, as I get out on the road to meet with Amtech's shareholders. Have a good evening.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating. You may all disconnect.